Business Interruption Policy Wordings - Challenges Highlighted by Claims Experience (February 2024)

In June 2009, the Chartered Institute of Loss Adjusters (CILA) organized a seminar in London to highlight confusion and uncertainty within BI policy wordings. CILA was mandated to take that project forward, and a working group was formed representative of the whole market. The issues identified were then subjected to two tests – first, is this a common problem? Second, can it be resolved by tweaking policy wordings? If the answer to both was 'yes', then this work incorporated the issue. So, following that distillation of the initial ideas, they had to be grouped into chapters. The initial report was published in 2012 by the IIL, benefitting from cross-market input, including brokers, underwriters, loss adjusters, lawyers, and loss assessors.

For each issue identified as a problem, potential solutions were offered. Every effort was made to avoid dictating one remedy alone. Some Insurers adopted elements of the reports, but wholesale adoption of the recommendations did not occur.

In 2019, the report was refreshed. Although this meant adding a second preface, the content remained unchanged. But the refresh was essential to avoid any perception that these were historical problems that had been resolved across the market. Covid-19 entered at the end of that year, and business interruption insurance became a topic for discussion in parliament and the focus of legal action, with cases still progressing through the courts.

In business interruption, anything that pre-dates Covid-19 feels like ancient history. So, the first reason this report is being refreshed again in 2024 is to avoid any presumption that the content is no longer relevant. The second reason is to highlight some key issues and be more pointed about those than the reports have been in the past. So, in response to the two most common causes of business interruption under-insurance (or under-declaration), this update:

Suggests that it is now time to stop using the term 'Gross Profit', and
Highlights the recommendation that insurers take responsibility to multiply annual amounts for longer maximum indemnity periods.
Continuing to use terminology that the evidence shows confuses people is not going to produce the Good Outcomes required by the FCA in the Consumer duty that came into force last July.

Depreciation: given that the Mobis Parts case in Australia came to the opposite conclusion to the UK courts regarding whether this is a saving, clarification is needed in policies. The commercial tension in encouraging mitigation whilst retaining a retrospective economic test is highlighted.

The Wide Area Damage content has been removed now that the FCA Test case has clarified the position (albeit the solution recommended back in 2012 was not inconsistent with the outcome of that case).

Please be advised:
The Insurance Institute of London and those individuals who give lectures and/or produce papers under its auspices are mindful of the need for such material to be complete and accurate as the occasion requires and permits. However, such material is not represented to be a full and authoritative statement of the law or practice relating to any of the issues covered and no liability for any error or omission or for any opinion expressed will be accepted by the speaker or writer, their employer or the Institute.

If you are a contributing author to this publication, to obtain a more advantageous discount, please contact Susan Phillip - susan.phillip@cii.co.uk