CHAPTER 7

Property and Interruption Insurance

Gordon J. R. Hickmott, MBE, FCII, FCIArb

Consultant, Willis, Faber & Dumas Ltd

To a modern broker the old terms 'fire insurance' and 'consequential loss
insurance' are outdated. He has to face current business needs and undertake the
efficient and adequate placing of covers for his client.

PROPERTY INSURANCE
The initial subdivisions of property insurance are:
(a) domestic insurances;
(b) traders' and small business insurances;
(c) commercial and industrial insurances.
These are discussed in the following paragraphs.
Domestic insurances
With the non-application of a tariff to domestic insurances and the introduction of
'comprehensive' schemes by all insurers, the broker is faced with a multiplicity of
slightly different policy forms with variations of words not always clearly showing
the actual intention of comparative protection vis-a-vis more normal, traditional
word-
ings.
Generally cost is indicative of the extent of the cover, most of which nowadays
includes some 'all-risks' type of protection to some property, and the application
of the 'excesses' is likely to vary also. Naturally the smaller insurance offices
and Lloyd's syndicates tend to draft their schemes to the particular markets to
which they have access.
Thus a broker is faced with the decision of choosing a selected few of the covers
to provide adequate alternatives to his clients with their various needs, and so
build up a reasonable portfolio with each to achieve a satisfactory administrative
and claims association.
The problem of adequacy of sum insured still remains a constant difficulty and
indexing schemes give a crude but generally adequate solution.
Traders' and small business insurances
Today insurers provide a range of 'inclusive' or 'package covers for the small
business risks which are of sufficient number or which can be easily grouped to
enable a designed form of broad coverage to be given (including liability and other
classes of business).
The range of cover is wide, but with some variation between insurers. Methods of
treating the interruption cover are likely to be on a formula basis in some cases
(i.e. up to 20 per cent of the contents figure, although the form of indemnity
wording will be traditional).
The cost will vary as a result of particular insurers' views on the desirability of
the business in the context of fire, theft and other insured perils as well as the
pressure from the competition for good business in this field which produces a
reasonable premium per policy and thus provides a worthwhile contribution to
'overhead' costs.
A broker is thus again faced with decisions of choice which administrative costs
and the near-impossibility of matching individual cases to covers reduce to the
selection of two or three insurers' schemes considered best suited for the clients
he handles. The matter must also be considered in the light of the other classes of
business included in or omitted from the package cover, the extent of the
protection offered and costing.
The schemes usually are separately designed for the following: retail shopkeepers
(with some special schemes for specific trades); motor garage businesses;
launderettes; hoteliers; boarding houses and the like; professional men (with often
special schemes for specific professions such as doctors, dentists, architects,
surveyors, estate agents and so on); and office-type risks designed to cope with
the wide variety of activities so embraced.
The problems of maintaining adequate sums insured are ever present and indexing is
not usually available on a permanent basis. The inclusion of buildings in the cover
adds to this problem as the increase in value of these may well be at a different
level to that of
the fixtures and fittings, etc., and stock. Provision for automatic increase in
value of stock in suitable cases for seasonal periods is desirable. It is also
necessary to see that provision is made under these covers to deal with:
(a) debris removal;
(b) stock declarations if stock values are high;
(c) professional fees of architects, etc.;
(d) protection of stock in transit (especially delivery risks);
(e) 'reinstatement' or 'indemnity' basis;
(f) local authority requirements after loss protection;
(g) inflation protection during the renewal period and the
reconstruction time thereafter.
At one time warranties covering oils, waste and storage measures regarding water
damage exposure, hands employed, etc., were common. Generally they should be
avoided as likely to cause difficulties by inadvertent breach.
Commercial and industrial insurances
This is the area where the larger cases are involved and the premiums justify
individual treatment to a greater extent.
Property and interruption insurance policies for industrial risks are in
common form in the United Kingdom (the arbitration condi-
tion varies in Eire) whether issued by the tariff or non-tariff market or Lloyd's
markets (except there is a slightly wider explosion cover applicable under the
Lloyd's policy when it is not forming a co-
insurance cover with a tariff or non-tariff company policy; also the Lloyd's policy
conditions vary slightly and no arbitration condition is included). A 'collective'
policy is where several insurers express their cover in a single document issued by
the leading office (usually the underwriter with the largest share). Lloyd's
underwriters do not join collective policies, but in accordance with their usual
practice their document on behalf of all these interests is issued by the Lloyd's
policy issuing and signing office or a broker may issue a certificate on Lloyd's
behalf. Where the Lloyd's interest is part of the whole, being a percentage of a
common specification, it is usually endorsed with what is called a 'warranty to
follow' clause — i.e. it follows the 'leading office' on claims settlements. There
may be, in addition, other certificates or policies for certain, non-tariff
insurers.
The basic protection by insurance of a business is its capital assets, i.e.
buildings, plant and machinery, etc., and stock. Build-
ings and plant and machinery can be insured either on an indemnity basis (i.e.
current values) or on a reinstatement basis (cost of restoring new for o ld). Stock
in trade can be insured for its value at
the time of loss (by agreement the immediate replacement value) and is usually
covered on a monthly declaration basis, the premium being adjusted at the end of
the period and the sum insured being fi xed to exceed any likely declaration.
Occasionally limited re-
placement covers are available.
Except for most private insurances, virtually all other policies incorporate the
'average' provision. This is an attempt by insurers to produce rates which are
based on a simple equitable level of comparison between one insured and another.
Some 'first-loss', i.e. non-average, policies are issued in respect of 'water
damage'-type perils and in a few other special cases by the `non-tariff market,
which has this freedom.
In a period of rapid but somewhat unpredictable inflation the advice by the broker
on the various methods of dealing with this problem for property insurance is
probably the most important item in this field. Numerous schemes are available to
deal with inflation during the currency of the policy and during the period of re-
construction after the loss, and all have their merits. It is always important to
remember the effect of taxation on capital gains, i.e. the difference in value of
the insurance payment and the tax written-
down value of that asset and the new depreciation allowance levels.
The selection of perils needs careful assessment, not only of the potential hazard
involvement and the financial risk relating thereto, but for political risks such
as 'riot', etc., against the likelihood of the market withdrawing the availability
of such cover if conditions deteriorate. The Northern Ireland position is an
example of where a
long period elapsed before the extra cover was withdrawn. The new situation
regarding incidents needs to be advised to the insured by their brokers, especially
for those to whom the cover in this area is
an occasional feature (transit risks, etc.).
Theft cover following the introduction of the Theft Act 1977 has resulted in this
term replacing 'burglary' and the insurance is usually restricted to 'following
violent forcible entry'. Such covers are often in larger cases on a first-loss
basis with an excess for any one loss.
In arranging covers the broker needs to deal with the following ancillary aspects:

(a) Architect's and/or other experts' fees.

(b) Debris removal.

(c) Local authority requirements after damage.

(d) Temporary removal of machinery for repairs, etc.
(e) The basis of cover for deeds, documents, records, computer
and electronic machine production material, goods in transit,
employees' effects and the like.
In the event of a loss of any significance (say over £100) it is normal for the
insurers to appoint a loss adjuster to resolve the matter on their behalf. It is
usual for such experts to act in a neutral manner and to assess the loss in
accordance with the policy terms and to clear the amount in discussion with the
insured's technical advisers, i.e. financial director, works manager, secretary,
etc. The broker's services in this field vary in practice but usually extend to
give broad advice on the manner in which to present the claim and any points
regarding the extent of the policy cover. Loss assessors
are available if so desired by an insured at a fee which is best negotiated in
advance if their services are considered worth while. In the majority of cases
losses are happily concluded directly with the loss adjuster.
If a loss occurs, the sum insured is reduced immediately by the amount to be
subsequently determined in accordance with the normal laws of contract. It is
advisable therefore to reinstate the sum if the property is restored or replaced
prior to the next renewal date, and clauses allowing for automatic reinstatement of
the sum insured in such circumstances are often found in policies.
The cover on plant fixtures and fittings comprises all other property except stock,
and care is needed to see that an insured includes provision in the sum insured
accordingly. Packing cases and packing materials may be worth a considerable amount
and their value together with other often non-capital items such as stationery
needs to be included in the cover.
Stock is usually insured on a declaration basis and prompt returns are essential to
avoid inadequate amounts being insured in times of inflation. The valuation of
stock by an insured is frequently on a historic basis which is inadequate in fixing
the cover.

INTERRUPTION INSURANCE
In addition to the physical loss, the financial loss to the business stemming
therefrom is dealt with under the interruption insurance policy. Formerly called
'consequential loss', 'loss of profits' and/or `profits insurance', which can be
misleading terms, the protection
granted is in accordance with a policy formula, i.e. rate of gross profit applied
to the reduction in turnover of the business in conse-
quence of an insured peril, together with the increased costs to minimise an
aggravated loss (but not exceeding the loss so saved) arising within the maximum
indemnity period (as selected to be
insured). Provision is made for the accountancy definitions and the business, the
premises and the insured to be defined. In any claim, adjustment can be made to the
previous financial account figures so that the loss is in respect of the 'would
have been' results that would have applied if the damage had not occurred.
The perils insured (for which there must normally be counter-
part physical damage cover) can extend to include those normal to property
insurances and such special perils as failure of public electricity or gas supply,
loss from infectious disease for hotel and similar trades, or electrocution of
cattle in farming risks. Machinery breakdown covers can be arranged usually on
selected plant.
Advance profits covers can be arranged for new ventures and these may include
marine transit risks.
Provision can be made, with first-loss limitations applying, to extend interruption
insurance to protect the financial trading of the business following damage to
other people's premises (those of suppliers, sub-contractors, customers, etc.) and
in transit.
It is normal, in current conditions, to insure 100 per cent of the remuneration of
all employees at a reduced-rate level, but more limited cover can be arranged in
this respect in suitable cases. This employee cover is largely a 'social'
protection to staff and their retention after a loss is thus safeguarded. While
savings can be made by non-replacement where employees leave, the cover is not on
the basis of the insured having to minimise the loss by dismissals.
The indemnity period, usually at least 12 months, is the limit up to which the
recompense under the policy continues. It needs to be sufficient not only to
restore the physical equipment and buildings but to allow turnover to reach the
'would have been' level. The sum insured is the forecast amount that might be at
risk for 12 months from the end of the renewal period of the policy (increased proP
ther
tionately if that exceeds one year). The premium is adjustable to is extent of
over-insurance only. If the maximum indemnity period more than 12 months, the sum
insured needs to be increased.
The cover automatically provides for the cost of auditors in preparing financial
details from the accounts, but not for the pre paration of the claim itself.
It is often found that consequential losses will arise such as

liquidated damages, above-economic increases in cost of working, deterioration or

wastage of undamaged stock, etc. Special items can
be added to deal with these exposures. This section has indicated the need for
individual review when arranging an interruption insurance and for the policy
accountancy definitions to be suitable to the system of accounting adopted.
A further form of special cover called 'book debts insurance' provides for the loss
flowing from the unrecovered monies from trading prior to the damage through the
destruction of the account records and the inability to collect the outstanding
debts. The essence of the insurance is the monthly declaration of outstanding book
debts which serves as a datum against which after damage the shortfall in recovery
of book debts can be measured. A low rate is
involved and the degree of duplication, protection of the records and sum insured
determines further reduction to it.
It is in the field of interruption insurance that the importance of the
assistance from loss adjusters and others arises as much can be done in emergency
conditions to minimise the potential loss.

FURTHER READING
Carter, R. L. (Ed.): Handbook of Insurance (with updating service),
Kluwer Publishing.
Carter, R. L., and Doherty, N. A. (Eds): Handbook of Risk Management
(with updating service), Kluwer Publishing.
Carter, R. L.: Reinsurance, Kluwer Publishing, 1979.
Browne, Denis: MacGillivray on Insurance Law, fifth edition, Sweet &
Maxwell, 1961.
Colinvaux, R.: The Law of Insurance, third edition, Sweet & Maxwell,
1970.
Ivamy, E. R. Hardy: General Principles of Insurance Law, third edition,
Butterworth, 1978.
Honour, W. B., and Hickmott, G. J. R.: Principles and Practice of Inter-
ruption Insurance, fourth edition, Butterworth, 1972.
Riley, Denis: Consequential Loss Insurance and Claims, fourth edition,
Sweet & Maxwell, 1977.