BI Policy Wordings - an updated book from the Insurance Institute of London and CILA

The Insurance Institute of London (IIL) and the Chartered Institute of Loss Adjusters (CILA) publish the Business Interruption (BI) insurance book 2024 edition (RS265). This latest edition, a collaborative effort between the two organisations, suggests essential updates and clarifications to BI policy wordings, reflecting the evolving nature of business and insurance needs.

In response to the causes of business interruption under-insurance (or under-declaration), CILA and IIL make several recommendations. These include cessation of the term 'Gross Profit’ and addressing the commercial tension in encouraging mitigation while retaining a retrospective economic test.

Key recommendations: The 2024 BI book introduces several recommendations aimed at enhancing clarity and efficacy in BI insurance coverage. These include:

1. Understanding 'Gross Profit': Using the term 'Insurable Profit' instead of 'Gross Profit' to clarify that it relates to what can be covered by insurance, ensuring a uniform understanding and application across policies.
2. Declaration-linked policies for periods other than 12 months: If the business interruption policy covers more than 12-months, policy holders should declare what they expect to earn each year, and the insurance policy should increase coverage for longer Maximum Indemnity periods (MIPs). The 2024 preface recommends that insurers (rather than policyholders) take responsibility to multiply annual amounts for longer MIPs.
3. Clarity on depreciation savings: Referring to the Mobis Parts case in Australia, which found that depreciation was not a saving, in contrast with Synergy Health v CGU in the UK which found that it was a saving, clearer policy wording would help all stakeholders understand how savings from depreciation should be handled. Uncertainty about recovery of mitigation expenditure continues to hamper efforts to avoid loss.
4. Applying the economic limit on increased costs of working: If a business case is submitted outlining a challenge, the expenditure required to address that, and the anticipated revenue benefit therefrom, then the economic test could be applied to the revenue reduction that it is anticipated will be avoided, rather than that actually achieved. The standard economic test is retained where there is no (adequate) business case submitted.
5. Wide area damage: Following the Supreme Court decision in FCA v Arch & Others (2021), the report removes guidelines that are no longer applicable regarding large-scale damage coverage.

Damian Glynn, previous Chair of CILA’s Business Interruption special interest group commented: “The first edition of this report was compiled to suggest tweaks to BI policy wordings that largely remain fit for purpose, notwithstanding covid-related disputes over two of the extensions. Contract certainty is more important than ever given the introduction of the FCA Consumer Duty in the UK last July.

We were concerned that there might be a presumption that anything pre-dating the pandemic on the world of business interruption was historic and not of current concern. So, our primary motive in issuing this update was to avoid that perception, and to apply minor tweaks such as updating newer survey data.”

Aruna Chandrapalan, current Chair of CILA’s Business Interruption special interest group added: “This report addresses topics identified by the BI community and CILA, highlighting those areas where we think some clarification would help customers, insurers and adjusters. We are grateful for the input of all original contributors, and to Sue Taylor, Tim McGain and John Pyall for their help with the 2024 update.”

IIL CEO Allison Potts says: “In an ever-evolving business landscape marked by unprecedented challenges, this comprehensive guide serves as a useful resource for insurers, adjusters, and policyholders alike, offering updates and insights into BI insurance policy wordings.

“This collaboration between the IIL and CILA underscores our shared commitment to excellence and continuous improvement in the insurance industry. By pooling our expertise and insights, we have produced a guide that not only addresses current issues but also sets a forward-looking agenda for BI insurance”.

Background:
The Business Interruption book incorporates feedback from a broad spectrum of stakeholders including CILA members, insurers and brokers.

On Friday 23 February at noon, you can catch the webinar launching the new edition.

Copies of RS 265 Business Interruption book (130 pages) can be purchased here and cost £30 plus p&p. The work is sold as a bundle which includes a paper copy of the book and access to a PDF copy for portability.