Documenting Business Interruption Claims
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Transcript Documenting Business Interruption Claims
Business Interruption
Values & Exposures
Dempsey, Myers & Company
Quinnipiac University
June 14, 2006
Today’s Presentation
BI Basics
BI Values Explained
Values v. Exposures
Hypothetical Claims
A Business Interruption Primer
The purpose of BI coverage is to do for the
business what it would have done for itself
had there been no loss.
Coverage generally triggered by physical
damage.
Reimburses net profits, continuing expenses
and expenses incurred to reduce loss
Optional coverage for extra expenses to
continue operations
Duty to mitigate
Coverage Triggered by Direct
Damage to Insured Property
Underlying Form:
ISO/Proprietary/Manuscript
Extended Period of Indemnity
Research and Development
E-Commerce
Extra Expense
Coverage Triggered by
Damage to Other Property
Contingent Business Interruption
Contingent Extra Expense
Interdependent Properties
Civil Authorities
Ingress/Egress
Service Interruption
Leasehold Interest
Royalties
Business Interruption
Three Essential Variables:
– Time
– Revenue
– Costs
Business Interruption
Key Revenue Streams - 2006 ($2.95b)
Auxiliary
activities
13%
Departmental
activities
4%
Investments/Other
2%
State of Michigan
38%
Student fees
24%
Local and private
programs
7%
Federal
programs
12%
Business Interruption
Expenditures and Surplus - 2006
G&A expense
6%
Fixed/other
4%
Surplus
5%
Instruction/research
40%
Operating
expense
18%
Scholarships
10%
Services
17%
Business Interruption
Reclassification of Expense Components
Fixed Cost
10%
Surplus
5%
Semi-Variable Cost
21%
Variable Cost
64%
BI Loss - Total Suspension
Projected
Actual
Loss
$1,000,000
$0
$1,000,000
Variable Costs
$500,000
$50,000
-$450,000
Other Costs
$400,000
$300,000
-$100,000
Net Profit
$100,000
-$350,000
$450,000
Sales
BI Loss - Partial Suspension
Sales
Projected
Actual
Loss
$1,000,000
$400,000
$600,000
Variable Costs
$500,000
$250,000 -$250,000
Other Costs
$400,000
$350,000
-$50,000
Net Profit
$100,000 -$200,000
$300,000
Business Interruption Loss
Evaluate Nature of Revenue:
– Will it abate in the event of loss?
State
of Michigan appropriations
Other government aid
Student fees
Auxiliary activities
Research grants
Interest
Business Interruption Loss
Evaluate Nature of Cost:
– Will it abate in the event of loss?
Instructional
costs (salaries, supplies)
Utilities and maintenance
Auxiliary expenses
Research costs
General & Administrative costs
Depreciation and interest
What are BI Values?
A projection
of what the business will do
during a 12-month period
What are BI Values?
Annualized estimates of net profit and
“continuing” (fixed) expenses
May or may not include “ordinary payroll”
(direct labor expense)
Computed for each insured location where
earnings are produced
Policy requirement of most insurance markets
How are BI Values Used?
To determine annual premium
To allocate premium to business units
To determine Probable Maximum Loss (PML)
and Maximum Foreseeable Loss (MFL)
yardsticks
To determine location limits of liability
To determine Average Daily Value (ADV)
deductibles
BI Value Concerns
of the underwriter
Location exposures and values
– Are high MFL locations properly identified?
EQ and windstorm exposures
– Are significant interdependencies
recognized in the underwriting process?
– Are significant CBI exposures disclosed?
– Are adequate loss control measures in
place to reduce loss exposures?
BI Value Concerns
of the risk manager
Conceptual framework and accuracy
– Do business units understand the purpose and
importance of accurate BI value reporting?
Premium allocation
– Are reported values calculated consistently among
business units and locations?
Process efficiency
– Is the right amount of data reported?
– Is the collection process rational and efficient?
BI Value Concerns
shared by risk managers and underwriters
Accuracy
– Are reported values based on reality?
– Are values computed in a manner consistent with industry
standards across all insurance markets?
– Are reported values suitable for calculating PML’s and
MFL’s, and for allocating insurance capacity?
– Are reported values a reasonable basis for calculating
premiums and determining location limits and deductibles?
Hypothetical Claim 1
Dormitory Flood
Assumptions
Heavy rains flood basement and first floor
Dormitory evacuated
Students relocated
– Hotels and other temporary quarters
Two month repair period
Ten students quit school, seek refunds
Hypothetical Claim 1
Dormitory Flood
Assumptions
Heavy rains flood basement and first floor
Dormitory evacuated
Students relocated
– Hotels and other temporary quarters
Two month repair period
Ten students quit school, seek refunds
Hypothetical Claim 1
Dormitory Flood
Issues Presented
Value of extra expense loss
– Living expenses
– Transportation
Value of business interruption loss
– Lost room revenue
– Lost vending profits
Hypothetical Claim 2
Service Interruption - Student Center
Assumptions
Natural gas curtailment in January
No heat or hot water
Building closed for one week
– Book Store closed
– Food service suspended
– Meeting rooms closed
Hypothetical Claim 2
Service Interruption - Student Center
Issues Presented
Value of business interruption loss
– Lost Book Store Profits
– Lost Food Service Profits
– Loss Mitigation
Value of extra expense loss
– Meeting relocation costs
Hypothetical Claim 3
Laboratory Fire - R&D Loss
Assumptions
Biochemical experimentation
US Government funded for fiscal 1997
Three-fourths completed at time of fire
Entire experiment lost; nine months to replace
Grant revenue $1 million; fixed cost $83,000/month
One month total suspension to repair fire damage
Risk of losing future grants if fail to complete
Hypothetical Claim 3
Laboratory Fire - R&D Loss
Issues Presented
Value of business interruption loss
– Total suspension period - 30 days
– Remainder of period - 9 months
– Lost opportunities
Other potential losses
– Expediting costs
– Extra expenses
Q&A
Contact Details
Sharon Pisko Wolfe, CPA
Dempsey, Myers & Company LLP
426 Danbury Road
Wilton, CT 06897
203-762-5052
[email protected]
Karen Henricksen, CPA, CFE
Dempsey, Myers & Company LLP
127 East 56th Street, 4th Floor
New York, NY 10022
212-319-8717
[email protected]