Property Insurance indemnifies what has been affected by damage to physical property during the actual loss event, but for a business to secure its longer-term survival, business interruption insurance is needed. A fundamental concept of business interruption insurance is the indemnity period, i.e., the time during which the insurance company indemnifies the financial consequences of the damage.
The standard indemnity period of 12 months is completely adequate in the majority of cases. By having this indemnity period, the policy-holder has time to replace destroyed property and get back into the market. Also, a 12-month indemnity period eliminates any seasonal variations that may exist.
In some cases, however, the insured should choose a longer indemnity period, e.g. 18 months or 24 months. Some typical cases are:
- where there are long delivery times for material to be replaced
- when the business is carried out, whether as a tenant or owner, in property that would take a long time to rebuild
- when the company is highly dependent on a few customers.
Long delivery times for replacing damaged material
In deciding the indemnity period, consideration should be given not only to the actual delivery time, but also to the time taken in installation and recommissioning. This can only be assessed on a case by case basis. For large, complicated machines such as turbines, total time for delivery and installation can be lengthy.
Businesses that use special machines that are adapted, built, or rebuilt should be particularly careful in deciding indemnity period. For example, a firework manufacturing company that had developed its own launch platforms, in which exact time delays were of major importance, suffered water damage. This equipment had been developed and tested over several years, and simply could not be replaced immediately, with long-term consequences for the business.
Again, when sales are made by using samples and/or exhibition displays, it can take time to replace them, even if it is possible at all. Companies that import direct from overseas manufacturers can also find it difficult to replace products during the season involved.
Activities carried out in special premises
Irrespective of whether you own or lease your business premises, it can the take long time to rebuild it if it has special features. This applies above all to listed buildings where modern methods and materials cannot always be used. An example in which a 12-month indemnity period was not sufficient was when fire damaged the beautiful old food hall in Uppsala. The business owners who did not have extended indemnity periods were forced pay some of the loss themselves. This can be especially important to bear in mind when the premises are leased, because of owners find it easier than tenants to affect rebuilding time.
Also, changes in the municipality's detailed plan can mean problems when burned-down property has to be rebuilt, in that rebuilding can actually be totally brought to a halt.
Dependence on a few customers
An accident can mean that customers abandon the affected company and place their orders elsewhere. For companies that are highly dependent on a few customers, the consequences can be devastating. It is often the case that finding new business is difficult and recovery takes a long time, which is why a long liability period gives the company breathing space in which to work itself back onto the market.
Other advantages of a longer indemnity period
Apart from that security conferred by an extended indemnity period, it is also easier for the policy-holder to get the insurance company to cover all the costs of recovery. Take for example a business that has suffered a total fire loss, has a 12-month indemnity period, and re-opens in month 11. In order to get back into business, the company wants to advertise the re-opening as widely as possible. The insurance company makes an economic assessment of how much an advertising campaign would reduce the consequential damage during the remaining month of the liability period, because this is the financial interest that the insurance company has to take into consideration. If the indemnity period had been 18 months, for example, there would be a higher probability possibility that the insurance company would fund a more extensive campaign.
Disadvantages of a longer indemnity period
Obviously, a longer indemnity period means a higher premium. However, the premium is not doubled when 24 months is chosen instead for 12, because in general the greatest damage from a time point of view occurs nearest to the time of the property damage.
In claims adjustment, it is also more difficult to determine the consequences of interruption as time passes. Of course, the longer the period after the initial damage, the more the outcome of the damage will be affected by other factors. It therefore becomes increasingly difficult for those affected by the damage to prove that the consequences are connected with the damage for which the insurer is liable.
Selecting indemnity period with care
It is important to think about the above points in deciding indemnity period: a well-thought-out contingency plan is absolutely essential. In this way, it is possible to plan actions in different loss scenarios, which means that the business is in a better position to assess the probable consequences and to reduce the period over which they will be affected by loss. This can also mean that a shorter indemnity period can be selected, so that the company can save on the insurance premium.
Staffan Ljung
