Internal audit training programme

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Material Damage Business Interruption Policies
Claims Handling

• Seminar on
• Understanding the significance of Material Damage
  Business Interruption Policies in Business

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Agenda Part I Material Damage

• Obligations of Insured after claim
• Obligations of Insurers
• Process of claims handling what Insurers want
  from adjusters
• Process of claims handling documentation
  required to prove claim
• Deductions

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Obligations of insured (after a claim)

• Must minimize loss - act as if uninsured remove
  to safety
• Must claim forthwith
• Must inform govt. agencies as necessary
• Must prove loss by insured peril proximate
  cause
• Must provide necessary details at his expense
• Must protect rights of Insurers
• Must claim truthfully

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Obligations of insurers

• Ensure Insured aware of his obligations
• Appoint suitable surveyor immediately
• Ensure process of claims handling is smooth
• Onus shifts to Insurers if loss by excepted peril
• Breach of Policy condition onus on Insurers to
  prove
• Expeditious settlement of loss

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Process of claims handling

• Insured, insurable interest
• Systems, processes
• Circumstances, leading to incident
• Determination of cause
• Nature and Extent of damage
• Policy conditions/warranties Liability
• Recoveries
• Loss minimisation measures
• Assessment/adjustment of loss

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Process of claims handling- documents

• Policy document Evidence of insurance and
  insurable interest
• Background of Insured
• Incident reports
• Systems prevalent/ processes
• Inventory of affected/unaffected property
• Photographs of damage

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Process of claims handling- documents

• Independent assessment of cause
• Layout plans
• Details of construction, communication,
  occupation
• Bank statements, Excise/ST Returns, Balance Sheets

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Process of claims handling- documents

• Details of claim, with evidence
• Evidence of age of damaged property
• Evidence of valuation of insured property
• Records of actual restoration carried out (fixed
  assets)

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Deductions warranted

• Depreciation (fixed assets)
• Obsolescence (stocks)
• Superior reinstatement (building)
• Technological upgradation (machinery)
• Salvage value
• Under-insurance
• Deductible

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Agenda Part II Business Interruption

• The Policy
• Conditions for valid claim
• Measure of Indemnity Terms used, computation
• Average Clause
• Increased cost of working

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The Policy

• Unique policy formula for claim working
• Covers loss of gross profit, which can be
  calculated in two ways
• Net profit insured standing charges, OR
  turnover, less variable expenses

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Conditions for a valid claim

• Loss by insured peril
• Loss at insured premises
• Loss must cause interruption of business
• Interruption only on account of damage to
  property
• Material damage policy is a must
• Claim must be admitted under Material Damage
  Policy

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Example

• Arising out of an indemnifiable incident,
  equipment is damaged and repair takes one month
  BI loss for this period is admissible
• Key employee killed in the accident. Due to delay
  in selection of a new employee and training, the
  equipment can be operated only after 3 months.
  Loss is not tenable

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Terms used

• Gross profit
• Indemnity period
• Maximum indemnity period
• Turnover
• Rate of gross profit
• Annual turnover
• Standard turnover
• Other circumstances clause

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Gross Profit

• Net Trading Profit (excl capital) Insured
  Standing Charges
• OR,
• Turnover Closing Stock (-) Opening Stocks
  Variable Expenses
• OR, if no net profit
• Insured Standing Charges (-) Net Trading Loss

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Standing Charges - Illustrative

• Interest on loans
• Rent, rates, taxes (tax on profit is included in
  net profit)
• Fees, including Directors renumerations
• Pensions
• Insurance premia
• Advertising, Publicity
• Conveyance, Stationery, etc
• Office, GA, RD
• Depreciation, RM
• PF, ESI, wages

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Indemnity Period

• The period beginning with the occurrence of the
  damage and ending not later than the maximum
  indemnity period thereafter, during which results
  of business are affected in consequence of the
  damage
• Different from maximum indemnity period
• Also different from period of insurance

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Turnover

• Money paid or payable to the Insured for goods
  sold and delivered, and for services rendered, in
  course of the business at the premises

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Rate of gross profit

• The rate of gross profit earned on the turnover
  during the financial year immediately before the
  date of damage. Provision is to be made for
  trend, so that the rate is that which would have
  been earned, had the loss not occurred

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Annual Turnover

• The turnover during the twelve months
  immediately before the date of damage

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Standard turnover

• The turnover during the period corresponding
  with the indemnity period in the twelve months
  immediately before the date of the damage

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Other circumstances clause

• To which such adjustments shall be made as may
  be necessary to provide for the trend of the
  business and for variations in or other
  circumstances affecting the business either
  before or after the damage or which would have
  affected the business had the damage not
  occurred, so that the figures thus adjusted shall
  represent as nearly as may be reasonably
  practicable, the results, which, but for the
  damage, would have been obtained during the
  relative period after the damage

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Adjustments

• External to business
• Inflation
• Change in statute/regulations
• War conditions - new material
• Internal to business
• Alternate method of production
• New technology
• Additional machinery
• Cessation of line

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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, in consequence of the
  damage, fall short of the standard turnover

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Measure of Indemnity

• Rate of gross profit x Reduction in turnover
  during indemnity period

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Savings clause

• 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 damage

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Average clause

• If the sum insured is less than the sum produced
  by applying the rate of gross profit to the
  annual turnover (or to a proportionately
  increased multiple thereof where the maximum
  indemnity period exceeds twelve months), the
  amount payable shall be proportionately reduced.

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Increase in cost of working

• The additional expenditure 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 damage, but not exceeding the sum produced
  by applying the rate of gross profit to the
  amount of the reduction thereby avoided
• Adjustment for uninsured standing charges

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• Thank You

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