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MODULE 3 - BUSINESS INTERRUPTION – handout 1
SPECIMEN ACCOUNTS
PDQ INDUSTRIES
Trading Account
£ £
Opening Stock 20,000Sales (Turnover)377,000
Opening work in progress 10,000Closing Stock 25,000
Raw Materials100,000Closing work in progress 15,000
Packing 50,000
Carriage 40,000
Gas 9,000
Electricity 4,500
Water 2,000
Telephone 1,500
Wages 40,000
Gross Profit140,000
______
417,000417,000
Profit and Loss Account
£ £
Salaries 25,000Gross Profit140,000
Rent/ Rates 8,000
Insurance Premiums 38,000
Interest payable 8,000
Office Expenses 15,000
Advertising 6,000
Net Profit 40,000
______
140,000140,000
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MODULE 3 - handout 2
“GROSS PROFIT” WORDING DECLARATION – LINKED BASIS
Item No.Estimated Gross Profit
1. On Gross Profit£
The insurance under Item No.l is limited to loss of Gross Profit due to (a) Reduction in Turnover and (b) Increase in Cost of Working and the amount payable as indemnity thereunder shall be:
(a)in respect of Reduction in Turnover: the sum produced by applying the Rate of Gross Profit to the amount by which the Turnover during the Indemnity Period shall fall short of the Standard Turnover in consequence of the Incident
(b)in respect of Increase in Cost of Working: the additional expenditure (subject to the provisions of the Uninsured Standing Charges Clause) necessarily and reasonably incurred for the sole purpose of avoiding or diminishing the reduction in Turnover which but for that expenditure would have taken place during the Indemnity Period in consequence of the Incident, but not exceeding the sum produced by applying the Rate of Gross Profit to the amount of the reduction thereby avoided
less any sum saved during the Indemnity Period in respect of such of the charges and expenses of the Business payable out of Gross Profit as may cease or be reduced in consequence of the Incident
Notwithstanding proviso 2 on the face of this policy
(i)the liability of the Insurer shall in no case exceed, in respect of Gross Profit 133.3% of the Estimated Gross Profit stated herein, in respect of each other item 1 00% of the sum insured stated herein, nor in the whole the sum of 133.3% of the Estimated Gross Profit and 100% of the sums insured by other items, or such other amounts as may be substituted therefore by memorandum signed by or on behalf of the Insurer.
(ii)in the absence of written notice by the Insured or the Insurer to the contrary the Insurer’s liability shall not stand reduced by the amount of any loss, the Insured undertaking to pay the appropriate additional premium for such automatic reinstatement of cover.
DEFINITIONS
Notes:1To the extent that the Insured is accountable to the tax authorities for Value Added Tax, all terms in this policy shall be exclusive of such tax.
2For the purpose of these definitions, any adjustment implemented in current cost accounting shall be disregarded.
Incident: Loss or destruction of or damage to property used by the Insured at the Premises for the purpose of the Business.
Indemnity Period: The period beginning with the occurrence of the Incident and ending not later than the Maximum Indemnity Period thereafter during which the results of the Business shall be affected in consequence thereof.
Maximum Indemnity Period:months
Turnover: The money paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.
Gross Profit: The amount by which –
(i)The sum of the amount of the Turnover and the amounts of the closing stock and work in progress shall exceed
(ii)the sum of the amounts of the opening stock and work in progress and the amount of the Uninsured Working Expenses.
Note: The amounts of the opening and closing stocks and work in progress shall be arrived at in accordance with the Insured’s normal accountancy methods, due provision being made for depreciation.
Uninsured Working Expenses:
Note: The words and expressions used in this definition (other than wages) shall have the meaning usually attached to them in the books and accounts of the Insured.
Estimated Gross Profit: The amount declared by the Insured to the Insurer as representing not less than the Gross Profit which it is anticipated will be earned by the Business during the financial year most nearly concurrent with the period of insurance (or a proportionately increased multiple thereof where the Maximum Indemnity Period exceeds twelve months).
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Rate of Gross Profit:– The rate of Gross Profit earned on)to which such adjustments shall be made as may be
the Turnover during the financial year immediately before)necessary to provide for the trend of the Business and for
the date of the Incident)variations in or other circumstances affecting the Business
)either before or after the Incident or which would have
Standard Turnover: The Turnover during that period in)affected the Business had the Incident not occurred, so that
the twelve months immediately before the date of the)the figures thus adjusted shall represent as nearly as may be
Incident which corresponds with the Indemnity Period)reasonably practicable the results which but for the Incident
)would have been obtained during the relative period after
)the Incident.
Alternative Trading Clause: If during the Indemnity Period goods shall be sold or services rendered elsewhere than at the Premises for the benefit of the Business either by the Insured or by others on his behalf the money paid or payable in respect of such sales or services shall be brought into account in arriving at the Turnover during the Indemnity Period.
Uninsured Standing Charges Clause: If any standing charges of the Business be not insured by this policy (having been deducted in arriving at the Gross Profit as defined herein) then in computing the amount recoverable hereunder as Increase in Cost of Working that proportion only of any additional expenditure shall be brought into account which the Gross Profit bears to the sum of the Gross Profit and the uninsured standing charges.
Renewal Clause: The Insured shall prior to each renewal provide the Insurer with the Estimated Gross Profit for the financial year most nearly concurrent with the ensuing year of insurance.
Premium Adjustment Clause: The first and annual premiums (in respect of Item 1) are provisional and are based on the Estimated Gross Profit.
The Insured shall provide to the Insurer not later than six months after the expiry of each period of insurance and declaration confirmed by the Insured’s auditors of the Gross Profit earned during the financial year most nearly concurrent with the period of insurance.
If any Incident shall have occurred giving rise to a claim for loss of Gross Profit the above mentioned declaration shall be increased by the Insurer for the purpose of premium adjustment by the amount by which the Gross Profit was reduced during the financial year soled in consequence of the Incident.
If the declaration (adjusted as provided above and proportionated increased where the Maximum Indemnity Period exceeds 12 months).
(a)is less than the Estimated Gross Profit for the relative period of insurance the Insurer will allow a pro rata return of premium paid on the Estimated Gross Profit (but not exceeding 50% of such premium)
(b)is greater than the Estimated Gross Profit for the relative period of insurance the Insured shall pay a pro rata addition to the premium paid on the Estimated Gross Profit
Notes:1Where the Uninsured Working Expenses are recognised variable charges, the Uninsured Standing Charges Clause and the reference thereto under paragraph (b) of Item No. I should be deleted.
2When the combined Material Damage and Business Interruption policy forms are used substitute “B” for “2” in line I of second paragraph.
SPECIAL CLAUSES
PROFESSIONAL ACCOUNTANTS CLAUSE modifying the Insurer’s rights under Claims Condition I
Any particulars or details contained in the Insured’s books of account or other business books or documents which may be required by the Insurer under Claims Condition I of this policy for the purpose of investigating or verifying any claim hereunder may be produced by professional accountants if at the time they are regularly acting as such for the Insured and their report shall be prima facie evidence of the particulars and details to which such report relates.
The Insurer will pay to the Insured the reasonable charges payable by the Insured to their professional accountants for producing such particulars or details or any other proofs, information or evidence as may be required by the Insurer under the terms of Claims Condition 1 of this policy and reporting that such particulars or details are in accordance with the Insured’s books of account or other business books or documents provided that the sum of the amount payable under this clause and the amount otherwise payable under the policy shall in no case exceed the liability of the Insurer as stated.
Notes:(1)“Auditors” may be substituted for “professional accountants”
(2)the second paragraph and the proviso may be omitted
(3)substitute “Condition 4”, “Condition 14,’ or “Condition 15” as appropriate for “Claims Condition l” when used with earlier versions of policy forms.
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MODULE 3 - handout 3 – exercise 1
BUSINESS INTERRUPTION – calculating gross profit
PDQ Industries
Discussions with management at PDQ have established that the Uninsured working expenses will be :-
100% Raw Materials
100%Packing
100%Carriage
20% Gas and Electricity
Based on this information calculate their Gross Profit figure in accordance with the policy definition.
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MODULE 3 - handout 4 – exercise 2
BUSINESS INTERRUPTION – MAXIMUM Indemnity Period
Working in pairs, calculate the Maximum Indemnity Period that could apply to the following insured, taking the worst case scenario.
Lite The Skies Plc
The insured occupy three premises situated in Lincoln; Birmingham and Leeds. The premises in Birmingham and Leeds are conversions of old mills and would not be rebuilt if destroyed. Many suitable vacant locations are available in both cities. The premises in Lincoln were purpose built and required considerable foundations to be dug. The rebuilding time for this location would be 15 – 18 months.
Production is carried out in Leeds and Lincoln. Both produce components that are assembled in Birmingham where they are packaged and despatched. The company manufacture fireworks and distress flares. The distress flares are produced under licence for the M.O.D. The contract has only just been won and took considerable negotiation to achieve, as competition was high for this lucrative work.
Machinery has been installed in Lincoln with very high specification from a supplier in China. It took 12 months to receive the machine after the order was placed and another three months to bed it down.
The raw materials are manufactured by two separate suppliers. The canisters for the flares are constructed on site from steel imported from Germany. It is of very high quality. One month’s supply is kept on site. Deliveries have been maintained, but the recent industrial action at the French ports delayed supply by three weeks and stocks are low. There are no other manufacturers of this steel in Europe.
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MODULE 3 - handout 5
BUSINESS INTERRUPTION – Indemnity Period Considerations
The following are examples of some of the factors that should be taken into consideration when establishing the Maximum Indemnity Period that should apply to a Business Interruption policy, it is not exhaustive.
Insured’s Business
–competition who, how many
–vulnerability to interruption/ loss of trade
Situation of all insured’s premises
–percentage of earnings from each
–dependency between any or all
–trade in each building
–any specialities in each building
–alternative premises locally
Buildings
–rebuilding time
–special construction features
Raw materials
–what is used
–where does it come from
– who supplies it – many or few
–alternative sources – any, how soon
–buffer stocks – how much, where
Other materials or components
–importance to production
–alternative suppliers
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Plant, equipment etc
–standard or specialist
–second hand market, spare parts held
–location of manufacturer
–susceptibility to damage from different causes – fire, water, breakdown
–key items
Power, water, air conditioning, humidifying
–main sources of power
–alternative supply arrangement – generators
–vulnerability to failure of supply
Finished products
–main marketing outlets
–warehouse use
–buffer stocks
–possibility of outside commissioning
–possibility of buying finished goods from competitors
–capacity of competitors/ secrecy of product
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MODULE 3 - HANDOUT 6 – STANDARD FIRE policy (BI)
The Insurer agrees (subject to the terms, definition, exclusions, provisions and conditions of this policy) that if after payment of the first premium any of the Property Insured described in the Schedule be lost destroyed or damaged by any of the perils specified in the Schedule during the period of insurance (or any subsequent period for which the Insurer accepts a renewal premium) the Insurer will pay to Insured the value of the property at the time of its loss or destruction or the amount of the damage or at the Insurer's option reinstate or replace such property or any part of it
provided that the liability of the Insurer under this policy shall not exceed
(i) in the whole the total sum insured or in respect of any item its sum insured at the time of the loss destruction or damage
(ii) the sum insured remaining after deduction for any other loss destruction or damage occurring during the same period of insurance, unless the Insurer shall have agreed to reinstate any such sum insured
This policy incorporates the Schedule, Specification and Endorsements which shall be read together as one contract. Words and expressions to which specific meaning is given in any part of this policy shall have the same meaning wherever they appear.
Signed on behalf of the Insurer
DEFINITION
The word "DAMAGE", in capital letters, shall mean loss or destruction of or damage to the Property Insured.
PERILS
A. FIRE but excluding DAMAGE caused by
(a) explosion resulting from fire
(b) earthquake or subterranean fire
(c)(i) its own spontaneous fermentation or heating, or
(ii) its undergoing any heating process or any process involving the application of heat
LIGHTNING
EXPLOSION
(i)of boilers
(ii)of gas
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used for domestic purposes only but excluding DAMAGE caused by earthquake or subterranean fire
B. EXPLOSION excluding DAMAGE
(a) caused by or consisting of the bursting by steam pressure of a boiler economiser or other vessel machine or apparatus in which internal pressure is due to steam only and belonging to or underthe control of the Insured
(b) in respect of and originating in any vessel machinery or apparatus, or its contents, belonging toor under the control of the Insured which requires to be examined to comply with any Statutory Regulations unless such vessel machinery or apparatus shall be the subject of a policy or other contract providing the required inspection service
*(c) by fire resulting from explosion .
*(d) by explosion
(i) of boilers
(ii) of gas
used for domestic purposes only
(e) by pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds
C.AIRCRAFT or other aerial devices or articles dropped therefrom excluding DAMAGE
(a) by pressure waves caused by aircraft or other aerial devices travelling at sonic or supersonic speeds .
*(b) by fire
D RIOT CIVIL COMMOTION STRIKERS LOCKED-OUT WORKERS or persons taking part in labour disturbances or malicious persons acting on behalf of or in connection with any political organisation, excluding DAMAGE
(a) arising from confiscation requisition or destruction by order of the government or any public authority
(b) arising from cessation of work
(c) by fire caused by Strikers Locked-out Workers or persons taking part in labour disturbances or Malicious Persons
E. RIOT CIVIL COMMOTION STRIKERS LOCKED-OUT WORKERS or persons taking part in labour disturbances or MALICIOUS PERSONS excluding
(a)DAMAGE arising from confiscation requisition or destruction by order of the government or any public authority
(b) DAMAGE arising from cessation of work
*(c) DAMAGE by fire caused by Strikers Locked-out Workers or persons taking part in labour disturbances or Malicious Persons
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