Clearly the rains have set in and the
negative effects on business operations cannot be underestimated. Regardless of
whatever preventive measures that might be put in place, some businesses may
still suffer a setback as their operations come to a halt temporarily due to
flooding or fire affecting their business premises thus denying their customers
access to their services, etc.
Very
often we forget that being part of a business’ structure is what puts food on
our tables, and that the slightest interruption in the business’ operations
could be dire to our livelihood. For instance, over a year ago, an internet
data service provider, in Accra, had parts of its network installation guttered
by fire.
Even
though the company’s management downplayed the impact, there is no need stating
the fact that it interrupted their operations for days, before returning to
normalcy.
However, the losses during the problem
management could be inundating. Instructively, business operations may be
interrupted by both technical and non-technical events such as fire outbreaks,
floods and allied perils.
One
might have seen a few filling stations closed down, albeit temporarily, owing
to floods cutting them off from their customers, fire gutting them, among
others. Unfortunately, these interruptions may occasion several losses,
including profits which are the underlying objectives of any business set-up.
Nkyenkyen Oil, an Accra-based Oil
Marketing Company, shut down its operations for about two months, due to an
inferno that destroyed two of its fuel pumps. The company, consequently, lost
several thousands of Ghana cedis in revenue.
Though
the company had taken a fire insurance, the claim could only be paid, among
others, after an investigative report had been concluded. The claim was
eventually paid. Unsatisfied with the turn of events, the company sued the
insurer for compensation in lieu of the delayed payment, stating that it had
lost both revenue and loyal customers, as a result of the delay.
Without
prejudice to the possible outcomes, this scenario typifies the essence of
Business Interruption Policy (BIP) or Loss of Profit Insurance. This is also
called Consequential Loss.
Effects of business interruption
Undoubtedly,
the lifeblood of every business entity is its cash-flow. In the scenario above,
though the insurer paid the claim after two months, the company, undoubtedly,
had already lost both customers and revenue, which could significantly affect
the livelihood of its employees.
Arguably, revenue (e.g. from sales) is
what companies rely on to pay salaries, rent, utilities, procure raw materials,
etc, hence any truncation of the source of revenue could have dire consequences
for the company. Indeed, in other jurisdictions, companies in such distress
would be obliged to declare some employees ‘redundant,’ and thus, pay them
compensation.
Does Nkyenkyen Oil Company have a case?
From
the scenario, the company may not succeed in its suit, as the insurer could not
be compelled to pay claims without recourse to thorough investigations. The
company should rather have taken a BIP against consequential losses; arising
from such operational interruption in addition to the other ‘physical’
policies. This may be likened to the loss of a family breadwinner, with its
attendant threat to family livelihood and survival.
What is Business Interruption Policy?
Business Interruption Policy (BIP), which
is also called Loss of Profit Insurance or Consequential Loss, provides
indemnity against losses arising from business operational interruptions
including loss in turnover.
The
associated financial compensation for the insured will normally not exceed the
circumstances immediately prior to the material destruction. For instance, if
gross trading profit is turning into a net loss from overhead expenses, a
business interruption policy would still respond after a disaster (e.g. fire or
flooding).
In
this regard, the indemnity would be equivalent to the underwritten expenditure
on overheads (i.e. insured charges). It’s however, most appropriate for
insurers to accept such liability under a typical fire policy.
Meanwhile, experienced loss adjusters
are required to ascertain the actual loss before the claim payment. This is to
ensure that the indemnity is not increased as a result of pre-existing cash
flow challenges.
The cover
The
policy terms/conditions usually include:
•
Definition of Consequential Loss exactly the way it appears in the policy
document (no curve, no bend)
•
Insured Perils following the fire policy (i.e. if there is no fire policy or
incident, no claim can be made on a BIP).
•
Exclusions such as war, toxic properties, radiation, acts of terrorism,
pollution, invasion etc do exist but can be ‘bought back’.
•
Voidable and alteration clauses on the basis of fundamental insurance
principles of Utmost Good Faith and Insurable Interest, respectively.
•
Loss of Profits following machinery breakdown and deterioration of stock can
also be covered.
Policy Extensions
Apart
from the standard policy terms and conditions, businesses can request an
extension with the payment of additional premiums on a BIP. To explain this
better, it is similar to purchasing a car; one may be required to pay extra for
an automatic transmission car as against buying a manual one. Other extensions
may include:
•
Increased Cost or Above Economic Limit (e.g. The Graphic Communications Group
Limited may request this to maintain the daily and weekly outputs of all of its
brands including the Daily Graphic and Graphic Business.
•
Goods in bonded warehouses outside the business premises
•
Where key Suppliers and/or Customers are the main source of turnover.
•
Others are automobile manufacturers’ extension, notifiable diseases especially
in the hospitality sector, transit risks, and moulds / patterns.
•
Damages and Fines
•
Access limitation owing to the fire gutting an adjoining property
•
Loss of Documents especially for professionals like engineers, lawyers, etc.
Claims Payment Processes
•
In the unfortunate event of fire, the insured must take appropriate steps to
minimize the loss.
•
The insured must immediately notify the insurer and provide them with all
relevant documents to assist in the claim processing.
Failure
to honour the above conditions would give the insurer the right to repudiate
the claim, by not accepting liability. In the event of disputes however, the
parties must first seek arbitration settlement before a court action.
The way forward
Given
the complexities in BIP, insurers have a responsibility of educating their
policyholders about the intricacies of the policy. Policyholders must also
appreciate the fact that basic fire insurance does not automatically cover loss
of profit during the period that a business grinds to a halt and awaiting
indemnity from the insurer.
Claims
payment of certain magnitudes can take a while as due process in investigations
would have to be conclusively dealt with. Similarly, in order to ensure
business continuity, business owners must request additional / extended clauses
to their policies especially during such seasons as this one.
“Until
next week, This is Insurance from the eyes of my mind”
Source:
Graphic.com.gh