BUSINESS INTERRUPTION From an Adjusters Point of View
PROFITS VS GROSS EARNINGS • Profits Form – the basics • Indemnity Period “ the period beginning with the occurrence of a peril insured against and ending no later than____ months thereafter during which the results of the business shall be affected in consequence of the destruction or damage by a peril insured against…..” • Indemnity extends through to the time that sales are restored to their normal levels. • Ordinary payroll is excluded – coverage outlines wages and salaries other than salaries to permanent staff and wages of foreman and important employees whose services would not be dispensed with should the business be interrupted.
PROFITS VS GROSS EARNINGS • Gross Earnings – the basics • Indemnity Period “the period beginning with the occurrence of a peril insured against and ending no later than, when repairs are completed with due diligence and dispatch.” • Indemnity expires when the property destroyed or damaged is replaced or repaired with no consideration for any loss which occurs after the physical facilities are restored. • Ordinary Payroll is not excluded – coverage outlines “the entire payroll expense for all employees of the Insured, except officers, executives, managers, employees under contract and other important employees.
ORDRINARY PAYROLL Why are my people not covered ? • We sometimes find there is a difference of opinion over which employees are classified as key and/or ordinary. In resolving this it is often helpful when we ask the following, • Are the individuals in question ones that hold positions of responsibility in the business due to experience, or special skills or knowledge, or are they people whose loss may result in decreased revenues or increase costs.
LIMITS AND CO ‐ INSURANCE From and adjusters point of view this is the most important part of business interruption coverage. • 50% 80% 90% 100% and Acutal Loss Sustained • All policies outline the necessary requirements for co ‐ insurance with the exception of a policy written on the basis of actual loss sustained and in that case NO LIMIT applies. (this can be dangerous)
I don’t operate a Drive ‐ thru
The perils of insufficient coverage Co-Insurance Shortfalls 2011 Profit $986,214.51 Policy Limits $495,000.00 Co-Insurance Requirement 90% Amount To be Carried $887,593.06 Co-insurance Penalty Figures Insurance pays (Did / Should) 55.77% Penalty is equal to 44.23% Total Financial Loss $152,754.90 Cost of under insuring $ 67,565.32
RAMIFICATIONS • The insured was shy on coverage based on his own misunderstanding of coverage, however he noted his broker had not explained to him the perils of not carrying sufficient limits. It was in his own opinion his brokers fault for not explaining this to him properly. • The benefit – a vehicle had driven into his Pub and we were successful in collecting the balance on his behalf through ICBC, avoiding issues w/ the broker being sued.
Settlement Process What is needed and why • 1. Latest completed Profit and Loss statement • 2. Prior sales history. • This can be in the form of daily, weekly or monthly sales and all depends on the duration of the loss. • 3. A list of employees both salaried and hourly wage and review of who is classified as key employees • 4. Any increases in the cost of working • 5. A list of all saved expenses
7 STEPS TO SETTLEMENT • 1. Determine the rate of gross profit • 2. Trending Sales Growth • 3. Projecting Sales Loss • 4. Calculating total lost profit • 5. Determine Non Continuing Expenses or Increase cost of work • 6. Application of Co insurance • 7. Calculate total claim loss
A private liquor store loss • The owner of a liquor store suffered a water damage loss but felt he couldn’t close as it was the May Long Weekend and his loses would be substantial. • The attached settlement was provided to him to approach his landlord who was responsible for the loss and agreed to cover his claim, however they had no idea what his true loss was.
Rate of Gross Profit Sales $ 2,755,230.00 Cost of Goods Sold $ 1,876,476.00 Gross Profit $ 878,754.00 % of Cost of Goods Sold 68.11% % of Rate of Gross Profit 31.89%
Trending Sales Growth Loss occurred over May Long Weekend Partially closed Sun May 20th, 2012 Percentage 2011 2012 difference Sales from 11 to Day Sales Sales 12 Friday $ 11,211.00 $ 11,285.00 0.66% Saturday $ 8,667.00 $ 15,181.00 75.16% Sunday $ 21,173.00 $ 15,186.00 -28.28% Monday $ 10,902.00 $ 15,024.00 37.81% Average increase in sales for Friday, Saturday and Monday This is made up of (.66 + 75.16 + 37.81 / 3) which = 37.88%
Projected Sales Loss Rate of Growth Projected Acutal Actual - Budget Day Sales 2011 for 2012 Sales Sales 2012 Balance Friday $ 11,211.00 37.88% $ 15,457.29 $ 11,285.00 $ (4,172.29) Saturday $ 8,667.00 37.88% $ 11,949.72 $ 15,181.00 $ 3,231.28 Sunday $ 21,173.00 37.88% $ 29,192.51 $ 15,186.00 $ (14,006.51) Monday $ 10,902.00 37.88% $ 15,031.25 $ 15,024.00 $ (7.25) $ 51,953.00 $ 71,630.77 $ 56,676.00 $ (14,954.77)
Calculating Total Lost Profit Sales Loss Had Store Closed Completely Total Sales Loss $ (14,006.51) $ (29,192.51) Rate of Gross Profit 31.89% 31.89% Total Loss of Profits $ (4,467.24) $ (9,310.67)
Non Continuing Expenses OPERATING EXPENSES Wages and benefits $ 208,313.00 Rent and occupancy $ 171,823.00 Amortization $ 36,290.00 Consulting Fees $ 36,094.00 Interest and bank charges $ 33,801.00 Delivery $ 14,878.00 Advertising and promotion $ 10,566.00 Supplies $ 10,333.00 Utilities $ 8,481.00 Repairs and Maintenance $ 8,453.00 Insurance $ 6,659.00 Professional Fees $ 6,000.00 Accounting Fees $ 3,360.00 Meals and Entertainment $ 3,176.00 Licence, dues and fees $ 2,815.00 Telephone $ 2,737.00 Office expense $ 2,067.00 Equipment rental $ 1,320.00 Legal fees $ 1,083.00 $ 568,249.00
Increase Cost of Working The additional expenditure…necessary and reasonably incurred for the sole purpose of avoiding or reducing the total claim Additional Labour Costs 4 staff for 8 hours at $13.50 x 1.5 (o.t) $ 648.00 Manager for 8 hours at $31.25 x 1.5 (o.t) $ 375.00 Additional Material Costs Extension cords $ 155.34 Batteries, lights and flashlights $ 153.09
Application of Co ‐ insurance CO INSURANCE Requirement 100% Carried $ 975,000.00 Required to carry $ 878,754.00 No penalty applies
Calculate total claim loss CALCULATE TOTAL CLAIM PARTIAL CLOSURE FULL CLOSURE Total loss of profit $ 4,467.24 $ 9,310.67 Total increase cost of working $ 1,331.43 $ 1,331.43 Total Claim Loss $ 5,798.67 $ 10,642.10
HOW TO DECREASE THE EXPOSURE • EXPEDITING EXPENSES ‐ is extended to insure the extra cost to make reasonable temporary repairs, or to expedite reasonable permanent repairs and to expedite permanent replacement of the lost or damaged property. • EXTRA EXPENSE – is extended to include the necessary “extra expense” incurred by the Insured in order to continue as nearly as practicable the “normal” conduct of the Insured's business following direct physical loss or direct physical damage.
HOW TO DECREASE THE OVERALL CLAIM • Commercial Strata locations and rentals ‐ It is to the benefit of the insurance company and the owner to be back in business. ‐ Should a serious loss occur in a Strata unit the Strata and/or adjuster may not be to worried about timely repairs as there is no issue with “lost rents”. ‐ In this case the Strata unit owners insurer, has the right to request the full payout on any repairs in the affected unit and can proceed on their own accord.
Thank you for attending Michael Jobson CIP Executive General Adjuster Major Loss Services mjobson@cl ‐ na.com 604 ‐ 293 ‐ 2607 office 604 ‐ 230 ‐ 1557 cell
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