1st November 2019

Claims scenario: Business Interruption indemnity period

By Rob Hammond
Associate Director - Technical Claims
Burnt calculator

Shop the Lot is a fictional homeware manufacturer trading from a unit of a business/industrial park built in the 1980s. Shop the Lot suffered a fire in April causing interruption to their usual business services. 

Below you will see a timeline of events to see how long it took the business to get back on their feet and able to return to business as usual. 


April - July (3 months since the incident): 

Investigation and Acceptance of Claims

After the claim had been made to the insurance broker, insurers appointed forensic experts to inspect the building. Due to the structural damage surrounding the seat of the fire, it was not possible to gain access until the site was made safe. It was suspected that the fire was an electrical fault, however, to determine the precise cause took a period of investigation. Insurers reconciled the results of the investigation with coverage and whilst they had some concerns initially, after a period of discussion between the broker and insurer, the insurers accepted coverage and the claim could proceed. Whilst there had been no delays by any party in dealing with their respective actions, it was now three months since the incident took place. This is not an uncommon time frame.

July - September (5 months since the incident): 

Assessment of Damage, Begin Planning Application and Tender Processes

Whilst complete demolition of the unit was not required, stripping the cladding and clearance of the internal fire-affected mezzanine and offices was. This was done concurrently with drawing up a specification for the necessary construction works. During the stripping out it was established that the structural steels were more adversely affected than originally thought and therefore it was necessary to alter the specification accordingly and this was sent out to a tender process.

Throughout the design and tendering process, planning approval was sought – contrary to popular belief, even if rebuilding “as it was” most Local Authorities will require that planning permission is sought. Even when this is straightforward, it usually adds to the overall project timeframe. Whilst Shop the Lot thought their rebuild would be a straightforward approval, this was not the case due to a neighbouring housing development that had been built since the construction of the units. Several changes were required as a result of the objections.

September - October (7 months since the incident): 

Completion & Review of Tenders

Whilst tenders had been received, reviewed and accepted by the end of month seven, it was not possible to schedule the start date until planning was approved. 

October - November (8 months since the incident): 

Planning Approval

Planning has now been approved. 

November - May 2018 (15 months since the incident): 

Rebuild

Building works began during the ninth month since the incident. Fortunately, the build went smoothly but nevertheless took six months. Practical completion was achieved 15 months post-fire.

May - December (22 months since the incident): 

Business Recovery

Whilst the building works had been completed by month 15 of the fire elapsing and Shop the Lot had moved back to their permanent location after being in a temporary location, it took the business a further seven months to fully recover to the position they would have been in had the fire never happened. Remember, Business Interruption insurance can provide cover for Loss of Gross Profit until that Gross Profit is no longer affected by the incident – the cover does not stop the moment the premises is reinstated.

Whilst the building works had been completed by month 15 of the fire elapsing and Shop the Lot had moved back to their permanent location following being in a temporary location. It took the business a further seven months to fully recover to be back in the position they were before the fire happened. Remember, Business Interruption Insurance can provide cover for Loss of Gross Profit until that Gross Profit is no longer affected by the incident – the cover does not stop the moment the premises is reinstated.

Thankfully for Shop the Lot, they had elected an indemnity period of 24 months against their previous period of 12 months. If the indemnity period hadn’t been sufficient the business may not have been able to recover fully and in the worst case may have even ceased to trade.

 


 

At Aston Lark, we recommend our clients to elect a period of at least 24 months – however, many other factors need to be considered such as Building Construction Type, Industry Type, Lead-time on business critical Machinery, dependency upon large Customers/Suppliers to name but a few. Proper consideration needs to be given to how long it would take for your business to recover and whilst we would recommend at least 24 months many of our clients recognise the need for longer periods to sufficiently protect this critical risk to their business.