Cedric E. Stephens
QUESTION: MY family and I operate a hardware store in rural Jamaica. Friends tell me that I should buy Loss of Profits Insurance. Can you explain how this kind of insurance operates? Is it essential for our business or, is it something that we can do without?
R.G., Mandeville P.O., Manchester
Answer: The World Bank, in its 1998/9 Development Report, said that "Information problems are often at the core of the difficulties that poor people in developing countries encounter in their daily struggle to survive and improve their lives." The "old-time" phrase "true word" is an appropriate response to that statement.
The World Bank comment applies to many issues - banking, HIV/AIDS, "get rich quick partner" schemes and insurance. The local non-life insurance industry provides an excellent example. Few persons inside it have anything but a cursory awareness of the subject about which you wrote.
Allow me to clear up one thing, before starting with your second question. Loss of Profits Insurance is a misnomer. It creates the wrong impression. The correct term is business interruption insurance. Coverage is available to all types of enterprises.
Those that operate at a profit, others that record losses and those that expect to operate at a profit at some future date. Coverage can even be bought for businesses before they start to operate. Non-profit organisations can also buy this kind of insurance.
In my opinion, BI Insurance is essential for all types of businesses. Most persons tend to focus on concrete blocks, cement and steel, that is physical assets, when they are buying (or selling in the case in the reps from insurers, agents and brokers) insurance. The real value of the asset lies in the economic value it creates. What stream of income does it generate?
The traditional asset-type insurances deal only with physical value. Income generated by the asset is often excluded. A common exclusion found in all asset-type policies is consequential loss.
Consequential loss is, simply, all those categories of losses that flow out of the damage (or destruction of) physical assets. These losses are excluded from asset-type policies because insurers feel that a separate type of insurance best covers them. In short, insurers, brokers and agents are aware of the shortcomings of the asset-type coverages. The reality is that very often, they do not use that knowledge
to sell business interruption policies. Asset-type and business interruption insurances are important for the survival of all types of business.
Business interruption insurance deals with the past, present and future. For this reason, several important things should be in place for it to operate properly. Buyers should have a good set of records to prove their losses. It is therefore critical that accounting and other records are up-to-date.
The insurance is designed to cover expectations of income, based on historical trends. Firms that buy BI insurance should have asset-type coverages in place. Thirdly, before a BI Insurance claim is paid, the insurers of the assets should have admitted liability for the physical damage claim.
BI Insurance is very flexible. It can meet the needs of all types of businesses. I would suggest that you arrange a meeting with your insurer, agent or broker. Ask them to take a specimen copy of the policy.
Get your accountant to attend as well. This way you should get a better idea of how BI Insurance works, how you should go about fixing a sum insured and precisely what would happen in the event of a claim.
Cedric E. Stephens is the founder of Insurance Help-Line, a telephone-based advisory service and co-host of Risky Business, radio programme that deals with risk and insurance. If you need free advice, write to the Financial Editor, or contact Mr. Stephens directly at aegis@cwjamaica.com
