Important dates in the history of Business Interruption Insurance

1797.
First attempts by Minerva Universal, England, to insure consequential costs (eg.inability to pay interest). Primitive book keeping methods prevented a successful introduction TheHamburger Generalfeuerkasse covers loss of rent as a supplement to fire insurance Time loss policy in England, also known as the per diem principle: daily/weekly compensation

1817.

1821.

Important dates in the history of Business Interruption Insurance

1857.
Chomage insurance in France (Alsace), known as systeme forfaitaire. The consequential loss from a fire is covered by a fixed percentage of the fire sum insured.

1880.

Dalton, an insurance agent in Boston (USA), introduces the expression use and occupancy, already familiar in fire insurance, for the insurance of loss of production following a fire.
British loss of profits system developed by Ludovig McLlellan in Glasgow; turnover is a key figure.

1899.

Important dates in the history of Business Interruption Insurance

1906. 1910. 1938. 1939.
Business interruption insurance is introduced in Sweden; it is based on the UK model. Business interruption following machinery breakdown policy approved in Germany by the supervisory authorities. Gross earnings policy in the United States - also known as the US Model. Standard fire loss of profits wordings in England and Ireland; this is known as the UK Model.

Important dates in the history of Business Interruption Insurance

1956.
Independent business interruption from the fire policy in Germany. Revision of gross earnings insurance conditions in the US, renamed Business Income Coverage Form.

1986.

Business Interruption Insurance

Material Damage Marine / CAR/ EAR Material Damage Fire/Spl.Perils
Machinery Insurance (MI) BPV EEI

Consequential Loss (BI) ALOP Consequential Loss (BI)

FLOP MLOP & (DOS) BPV - LOP EEI - LOP

ICOW

Consequential Loss Covers (In-built)

Dwellings Owner Occupant Rent for alternate Tenant (on lease) accommodation Loss of Rent Offices - Additional rent for alternate premises Shops - Business interruption

ALOP

DIFFERENT NAMES

INSURANCE

Advance Loss of Profit (ALOP) EAR-/CAR-ALOP Principals Advance Loss of Profit Loss of Anticipated Gross Profit Delay in Scheduled Commencement Advance Consequential Loss (ACL) Loss of Rent (CAR)

Principals Advance loss of Profits Insurance

BASIC COVER: Loss of gross profits due to reduction in turnover or Increase in cost of working, arising as a result of Delay in the commencement of business operation / commercial commissioning of the plant due to:
Interference / interruption of erection / construction work caused by

Loss / damage indemnifiable under the basic material damage-erection all risks policy

Alop Cover can be extended to

Manufactures premises - if a fire or other incident at any manufacturers premises (local or overseas) causes delay of any essential equipment, the DSU Policy would operate. Marine and Transit Risks - if delay results from any accident to equipment or materials in shipment or transit (such as the turbines), the DSU cover will be triggered to pay a loss. This exposure may have to be insured as a separate policy.

POLICY PERIOD / INDEMNITY PERIOD / DELAY

Policy Period:
Same as in the material damage, erection all risk policy Terminating on the date mentioned in the EAR policy or any earlier date when the EAR cover ceases.

Period of liability / maximum period of indemnity: The period commencing from the
date of commencement of Insureds business / commercial operation, selected by Insured during which the insurer would indemnify.

 Schedule date of commencement of Insureds business: The date as per original PERT/BAR chart or
contract copy to be submitted.

Delay: Period of time between scheduled date of

commencement of the insureds business and the actual date.

Indemnity Period:
Period not exceeding the period of liability / maximum indemnity period stated in the policy Commencing from the date, the insureds business would have commenced and During which the insureds business are affected as a result of delay

LOSS SETTLEMENT / ASSESSMENT

Loss of Gross Profit:
Sum obtained by applying the rate of gross profit to the amount the actual turnover during indemnity period falls short of the turnover which would have been achieved had the delay not occurred.

LOSS SETTLEMENT / ASSESSMENT

Increased cost of working:
Any additional expenditure necessarily incurred for the purpose of avoiding or diminishing the reduction in turnover which . Without such expenditure, would have taken place during the indemnity period But not exceeding the loss calculated as per loss of gross profit. Examples of increased cost of working Speeding up of repairs / transport, Make-up loss after commissioning.

LOSS SETTLEMENT / ASSESSMENT

Average clause / under insurance:
If the sum insured is less than the sum obtained by applying the rate of gross profit to the annual turnover,the amount payable shall be reduced proportionately. While calculating the annual turnover and the rate of gross profit,the following factors also shall be taken into consideration:
Result of business for the 12 month period after commencement Special circumstances which would have affected the insured business had the delay not occurred. Special circumstances affecting the business after commencement

DEFINITIONS
TURNOVER, ANNUAL TURNOVER, ROGP etc,.

Turnover: Money (less discounts allowed) paid/payable to the insured for services rendered in course of Insureds business. Annual Turnover: The turnover, which, had the delay not occurred, would have been achieved during the 12 months after the scheduled date of commencement of business / commercial operation.

 Annual Gross Profit : The amount by which, sum of the value of annual turnover and the closing stock exceeds the specified working expenses and the opening stock. Rate of gross profit: The rate, which had the delay not occurred would have been earned on the turnover during the indemnity period.

SPECIAL POINTS...
Only one claim per policy:
Delay due to all the accidents would be considered together during the liability period after business commencement / commercial operation and would constitute one claim only.

Insured and un-insured delay:

Reasons for all delay would be ascertained and only the delay which are caused by an indemnifiable event & indeminifiable in material damage erection all risk policy is covered.

 POLICY EXTENSION: Any extension of time taken under the material damage - erection all risk policy, would not automatically mean extension under ALOP policy. The reasons for extension / non completion of the project has to be informed to the insurance co. and extension to be mutually agreed.

SPECIAL EXCLUSIONS
Time excess Delay in commencement of business / commercial operation due to: Loss / damage covered under extension of erection policy unless it is specifically agreed that delay resulting from such loss / damage is also indemnifiable. Surrounding property

SPECIAL EXCLUSIONS
Damage to construction work of a prototype in nature. Loss / damage to construction plant, machinery. Earthquake, volcanic eruption. Shortage, destruction, deterioration or damage to any materials / operating media. Addition, alteration, rectification of defects / faults carried out during repair / replacement. Non-availability of funds. Consequential loss / liability of any kind like penalties, fines, late completion or non-completion of orders etc.

SUM INSURED : PREMIUM

Premium rate would depend on various factors like: Nature of project e.g.. power plant.etc Period of liability selected. Time excess. Location - access / proximity to airport, rail port, etc. Suppliers of major equipment-foreign / overseas supply. Major spare parts available for major machinery. Repairers - where major repairs possible etc. Superior features of the project in particular the proposed protection measures / in built protection against major

risk.

CONTRIBUTED DELAY FACTORS

TO BE ELIMINATED
Administrative disorganization. Delay in shipment of supplies. Climate influences on the work schedule (without causing material damage) Shortage of funds leading to temporary interruption of works. Deterioration of infrastructure or slowness of public services. Generally all subsequent incidents which aggravate the delay but which have no proximate connection with the incident that caused material damage.

PROJECT AND INSURANCE PERIODS

Insurance Period CAR/EAR - ALOP

Max. I.P. (ALOP)

Planning Transit

On site Cold Hot Commercial storage handling PreOperation Construction Test Erection Scheduled date of commencement of insured business

SCHEDULED BUSINESS COMMENCEMENT DATE

CAR
Construction

Maintenance period

EAR
Erection Test

Maintenance period

ALOP Period of Insurance Commencement

Maximum Indemnity Period

ACCIDENT/INDEMNITY PERIOD IN ALOP

Gross Profit $/day

Scheduled business commencement

Actual business commencement

Accident

Delay

Original contract period Original MD-,ALOP-Policy period

Maximum Indemnity Period

Final contract period Extended MD-, ALOP- policy period

ADVANCE LOSS OF PROFITS Only one claim Accident and One Time Excess per policy

Accident

Accident

Scheduled business commencement

Time Excess

Delay

ADVANCE LOSS OF PROFITS

Only one claim per Policy

Accident

Accident Accident Accident

Scheduled business commencement

Delay

ADVANCE LOSS OF PROFITS

Insured and Uninsured Delays

Negligence Shortage of Material Strike

Scheduled business commencement

insured delay uninusred delay Indemnity Period

ADVANCE LOSS OF PROFITS Insured and Uninsured Delays

Negligence
Shortage of material Strike Fire

Scheduled business commencement

Insured delay Uninsured delay Indemnity Period

Essential Information for Risk Assessment/Pricing

Construction / Erection Program Machinery Details Loss Minimisation Possibilities Maximum Indemnity Period Time Excess Sum Insured

Recommendations for the Underwriting of ALOP Risks (I)

Not to be covered:
Prototype machinery (possibility of limited cover for extended outer damage only) Second hand plant or machinery testing Foreign machinery (without adequate local repair facilities/spare parts) ALOP in foreign countries without local representation of the leading insurance company Risks without the possibility to participate in the future covers following the commencement of commercial operation i.e. MB/MLOP(?)

Recommendations for the Underwriting of ALOP Risks (II)

Not to be covered:
Risks without complete underwriting information incl. construction time schedules, flow sheets, copies of the contract documents and details as per MLOP questionnaire Marine Risks Manufacturers Risk at the suppliers premises Movable equipment (problems in respect of extended coverage SRCC, Theft, etc.) Cover restricted to testing only Suppliers extension

Special ALOP Considerations :

Causes of delay and correction of time schedule Insured ALOP value and business situation Major spare parts and spare units Site access and transit options Alteration in risk that affect schedule Verification of progress reporting of client Permanent site representation of insurers

Loss Example - Construction of a Hotel (1)

General Information Type of Hotel : Five Star De Luxe Hotel with 384 guest rooms and a total of 16 storeys 45,000 sq.m Shops, Swimming Pools, Ball Rooms, Landscape Development Piling, Spot Precast Concrete and other finishing works of Electrical and Mechanical works 0.7 meters Piling and slurry walls

Construction Area : Scope of Project Method of Construction Underground Water Level Foundations : : : :

Loss Example - Construction of a HOTEL (2)

Time Schedule Ground/Piling Works 4 months

Skeleton Works
Utilities Landscape

Finished Works
Opening Contract Period (policy) Extension (2months) (38 months)
Indemnity Period 3.5 months (within original time schedule) extension 1 week before end of cover

Inspection
3 months before schedule opening as per policy Accident one week after extension

Loss Example - Construction of a Hotel (3)

Accident Causes of fire Damage : : : fire in the main vertical shaft, conveying cabling from 1st floor to the top of the building short circuit of cables in the shaft all types of cabling in the shaft and around elevators incl. control boards and machines, housed furniture, air-conditioning, ventiliation Property US$ 7,25 Mio Advance Loss of Profit US$ 1,195 Mio After application of T.E. and average US$ 646.000 Indemnity Period : 106 days (IPL 24 months; T.E. 30 days)

Loss

Loss Example - Construction of a Hotel (4)

Important Facts
all fire fighting facilities were at site, but
use of diesel emergency pumps not possible because theft of fuel use of electric emergency pumps not possible because of no connection to public power supply / Hotel Water pressure for the hydrant system from the public water supply inadequate to reach higher floors hote hydrant system could not be used as it is a joint system for hydrants and sprinklers, because at many locations throughout the hotel the sprinkler heads were not installed and the pipe heads were not plugged ------ to avoid possible water damage MR Clause 112 (fire fighting facilities) was not applied

ALOP RATING
CAR / EAR -- ALOP rating for individual Risks ( without statistics) - Estimate the maximum realistic delay period resulting from one or more evernts. (CAR/EAR: i.e. for all key items). - if the estimated delay > = Indemnity Period Limit (IPL), use the IPL for calculation. - Estimate the claims frequency by utilizing CAR/EAR claims experience.

 Rate for ALOP = f x Pav x f cost f x Pav = burning cost rate f = claims frequency Pav = average delay period in months per 12 months Example: - estimated delay exceeds IPL - IPL = 6 month - frequency : one claim in 50 contracts
Rate ALOP= 1
50

6 x f cost=0,01xfcost= 10%o x fcost

12

Burning cost rate