Natural disasters have hit Australian business hard this year. Many of those lucky enough to escape a direct hit, have taken a profit dive due to the knock-on effects from floods and cyclones.
First it was floods in Queensland, then parts of Victoria were flooded. It seems we had barely recovered, when Australia’s far north-east was hit with Tropical Cyclone Yasi, a category five storm.
But with Brisbane, Australia’s third largest city, severely flood affected, the economic impact of the recent floods has surpassed most previous natural disasters.
Power blackouts and road and rail cut-offs halted business activity for many thousands of business owners who were nowhere near the affected areas – and the majority of them had to wear the loss, as they did not have appropriate insurance cover.
David Hoffman, who is Head of Property for Vero, believes that Business Interruption is one of the least understood major products in general insurance.
He estimates that two in five enterprises that experience a disaster will go out of business within five years, but less than 40 per cent of small to medium enterprises have Business Interruption insurance.
Extensions to Business Interruption policies
In order for the policy to be the most suitable for the business, the broker should spend time getting to know the business in order to best meet its requirements. Hoffman says that the standard industry wording in an Industrial Special Risks policy should be adapted to fit individual clients.
A policy covering Business Interruption due to flood will only be viable if flood damages cover is in place. But Business Interruption without direct damages may still be viable, he says.
“Extensions to the policy mightinclude extra damages from non-operation of a public utility and the time limit before that kicks in can be specified. A food manufacturer might need 24 hours, whereas for textiles perhaps 72 hours is okay.
”Other extensions can include covering a revenue reduction due to Business Interruption following material damage to a customer’s or supplier’s premises."
Hoffman recommends that brokers look out for standard wording on cover for non-operation of public utilities and make sure that it covers not just adjacent utilities such as electricity station or sub- station, gasworks or waterworks, but relevant utilities that exist anywhere in Australia.
The amount of coverage would vary according to how much of an impact that damage to a particular customer or supplier’s business would have.
Rates for Business Interruption insurance don’t just follow standard material damage cover he adds, and the more information provided up front, the better.
“Things like the insured’s risk management and contingency plans and their exposure are considered. An importer is a lower severity risk compared to a manufacturer, as an importer could rent a new warehouseand get back in operation very quickly.
Indemnity period
With Business Interruption insurance, specifying an adequate indemnity period is critical, says Jake Krausmann of Suncorp Commercial.
“Following a fire it could well take more than 12 months once you’ve gone through removal of debris, design, council approval, building and then getting back your market share,” he says.
“We suggest brokers consider carefully the length of indemnity for the business. Two years is often a better option."
Business Interruption insurance cover meets the fixed costs that still go on after a material loss, and that won’t drop in line with a turnover reduction after a loss. For example, staff wages, rentals and lease payments, which remain payable regardless of the status of the business.
Forensic accounting
Chris Ehlers is a Brisbane-based forensic accountant and Director of specialist firm Matson Driscoll and Damico, who consult to loss adjustment teams. “We focus on the financial aspect of the loss and try to quantify that,” he says.
Ehlers is currently dealing with several large businesses affected by Queensland’s recent floods. “Ultimately, our task is to put the insured back in a position that they would have been before the floods and try to get them back into business as quickly as possible."
Ehlers’ team can assess such things as the cost benefit of incurring an expense to shorten the time period of repairs and therefore the period of interruption.
“More straightforward decisions might include whether to get generators in to try to resume operations prior to electricity being restored to you, or whether to air freight a particular part for repair,” he says.
The last thing we want is for an insured to be down for a period of time and their customers start To look elsewhere.
But more often the decisions are complex. A business may want to incur overtime to resume production or to get inventory levels back to pre-loss levels to minimise the impact on sales.
“The last thing that we want is for an insured to be down for a period of time and their customers start to look elsewhere and develop other relations with their competitors so that there is an ongoing loss,” Ehlers says.
“We try to do all we can to get them back up and running as quickly as possible."
When Ehlers team is involved at an early stage, they can be a resource for loss adjusters rather than second- guessing decisions that have already been made, he adds.By implementing some planning up front, everyone can focus not just on the repairs but on other mitigation efforts available, he says.
“That works better than racing out to get the machines running then coming back at the end and asking what the financial impact was.”
CASE STUDY: Tully Sugar Mill
When Cyclone Yasi swept through the far north Queensland town of Tully, one of the biggest sugar mills in Australia copped some serious wind damage, mainly to a cooling tower essential to manufacturing.
Fortunately, sugar milling has a distinct production season from July to December, so the cyclone hit at a relatively convenient time.
The company is embroiled in a big material damages claim at present and there’s a rush to repair the plant ready for production in a few months – but there’s still potential for a Business Interruption claim once the impact on the business has been assessed.
Insurance broker Paul Simmons, who services the account for Aon Risk Services, says that the company’s half-year production cycle is factored into the risk assessment for their Business Interruption insurance.
A specialist assessor, who understands sugar cane mills, is monitoring the Tully claim for the underwriters. A Suncorp spokesman says that much of it hinges on the progress of repairs.
If all repairs aren’t completed in time for production and the mill’s capacity is down, the mill’s Business Interruption insurance will cover the reduction in their insurable gross profit.
Another component covers the potential increased cost of working. The mill generates power with processed residual cane pulp, but with lowered capacity may need to purchase coal to power production – a cost covered by the Business Interruption insurance.
“You need to really understand your client’s business and its phases – and what is going to potentially impact their activity, to be able to draw up the right policy,” says Simmons.
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