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Frequently Asked Questions

Sums Insured and Declared Values


Brokers are not builders and cannot advise on building replacement values. Why are brokers responsible for ensuring the client provides the correct figures as we are not accountants?

We can use the tools available but the accountant would have a better understanding of the financials.

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Brokers are not expected to replace the client’s accountant or financial advisor nor are they to be held responsible for the preparation of financial information.

However, brokers need to be able to interpret the financial information provided to them, particularly the Profit and Loss statements for the purpose of arranging Business Interruption insurance. If a broker is not skilled in interpreting financial information then they need to seek assistance from professional firms such as MSM Loss Management.

The Eurokey Recycling Ltd v Giles Insurance Brokers UK legal case provides guidance on the role of the broker and their responsibilities.

Please see the Eurokey case for further information.

Could we get the client’s accountant to complete an online Business Interruption Declared Values calculator as they would understand the financial statements?

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Accountants are responsible for preparing Financial Statements, not for arranging BI cover. They generally don’t understand insurance.

As a broker, you need to explain what Insurable Gross Profit represents and seek his/her assistance in arranging a BI cover.

A useful guidance tool is the Eurokey Recycling Ltd v Giles Insurance Brokers court case which provides guidance on the role of the broker and their responsibilities in the instance described above.

Please see the Eurokey case for further information.

How do you calculate Insurable Gross Profit in 24mths in advance without underinsuring the client?

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With some difficulty and due care. You must work through the next 3 years carefully i.e. the insurance year and the 2 year Indemnity Period. An 80% co-insurance clause assists in creating a margin for error.

There are many instances where you can arrange for the co-insurance/ average clause to be removed if you have a formal BI review.

How do you deal with fluctuations in commodity prices and foreign exchange in setting Business Interruption values?

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Companies that are dealing in commodity prices and have foreign exchange exposures may have volatile financial performance. As an example look at the Australian dollar in recent times.

If the Business Interruption review was undertaken by MSM or a similar firm (or met other conditions set by the policy) at the commencement of the policy period there would not be any need to make a review during the policy period.

Otherwise the safest option is to be conservative in your assumptions (potentially over insure) and adjust the Policy at expiry and invoke the Premium Adjustment clause.

Otherwise you need to constantly monitor the cover and adjust accordingly.

How would you calculate Sum Insured for a small start-up business that doesn’t have a historical financials, a business plan or forecast?

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If possible we use budgets or projections that may be available if these provide us with a view on where the business is going. As the question suggests this is not always possible. This is a difficult exercise and requires judgement. Generally the owner will have a view on where the business is tracking into the future and have a view of future trading.

If in doubt we encourage a review regularly i.e. mid-year to ensure that the Sum Insured is consistent with how the business is trading.

I am a Steadfast Broker and have been told if you use the Steadfast Calculator the Average clause is removed. Is that correct?

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On Business Pack Steadfast Policy Wordings this is correct but you must use the BAS statement input option. A Business Interruption Calculator is not an insurance policy against underinsurance.

If an Insurable Gross Profit calculation is based on budget figures is this acceptable to the insurer or would the insurer seek verification of a loss based on financial accounts?

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The determination of the loss of gross profit in the event of any claim depends on the actual trading circumstances instead of the budget or forecast used at the time of the cover being arranged by the broker.

Sometimes the budget is a better tool than historical data in setting a declared value. This is very relevant where there is forecasted to be a significant change in the businesses circumstances going forward.

If purchases are always variable, why doesn’t the Steadfast Business Pack Insurable Gross Profit definition automatically exclude them?

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They are generally variable – sometimes they can be fixed on take and pay contracts in the agricultural and mining industries.

Most Insurers wording list purchases as an UWE on Business Packs – some include freight and packaging. You need to check the specific wording on each.

I had a client’s accountant use an online calculator to Insurable Gross Profit. Is that acceptable?

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Business Interruption calculators for Insurable Gross Profit are designed to simplify the calculation process and should be used with some caution. As the common adage goes, ‘garbage in, garbage out’.

The user must know all elements or variables used in the business interruption review in order to use Business Interruption calculators and it will therefore depend on their level of technical expertise. We would recommend that the calculations are reviewed by a professional claims preparer such as MSM if you have any element of doubt in the calculation or assumptions used.

I need a simple way to calculate Insurable Gross Profit for my smaller clients – any tips – do you have a one pager?

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The simplest method is to arrange a business interruption cover based on Annual Revenue – alternatively, turnover less purchases is a good approach but you must allow for trend during the insurance year and Indemnity Period. We recommend when in doubt consult with an expert such as MSM Loss Management.

We are told that brokers should not simply ask the client’s accountant for the Sums Insured. Wouldn’t the client just do this anyway?

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Not if you advise and educate your client correctly.

Please see the Eurokey v Giles Insurance brokers UK court case which provides guidance on the brokers responsibilities when setting the Sum Insured.

What’s the danger of using turnover less 10% to come up with a sum insured figure as I have known other people to do? Are we better to use the gross profit different method?

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Turnover less purchases is a sensible approach as an alternative. Deducting 10% from the turnover number is speculative. Then you need to add for trend through the insurance year plus the Indemnity Period. Your methodology could lead to significant under-insurance.

What is the cost of a BI review? Is it turnover based?

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On average it is around $2,500 – $5,000 plus GST for a review where travel is not involved and the turnover is under say under $20,000,000.

On complex cases or larger clients it can vary and you should discuss with an MSM team member for your specific client’s situation.

What if turnover/ revenue increases but Insurable Gross Profit doesn’t change?

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The drivers for Business Interruption cover are both revenue and gross profit. If gross profit remains the same though revenue is increasing then the rate of Insurable Gross Profit has decreased due to increased costs or reduced selling price. That is why you need to review your client’s business operations during each and every annual review. The cover should be based on Insurable Gross Profit.

What do you suggest can be done about the confusion around Uninsured Working Expenses to ensure we get the Sum Insured right?

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As a start we suggest you provide definition of Uninsured Working Expenses and examples to your client. You need to work with the client on getting this right.

The MSM Helpline is also a source of assistance and we are generally to discuss your client’s situation and give you some preliminary views as part of this service.

What is an estimated cost for MSM to undertake a Business Interruption review? Could you provide a range and recommended review timeframe. (E.g. Done every 3 years)

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Steadfast requires a BI review to be undertaken every 3 years in order to waive the coinsurance clause.

The cost of BI review depends on the size and complexity of the business. For an SME the cost is around $2,500 to $5,000 plus GST (for businesses up to say $20m turnover).

It depends upon the business, the location and the complexity.

What do I do if my client withholds information or is secretive about their financial information?

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You need to explain the necessity for full disclosure and the consequences of withholding information.

Whatever you do, it is important you document your communications with your client so that it is obvious that you have discharged your duty of care.

What is the difference between Gross profit vs Gross Income?

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You need to review the specific Policy Wording and ensure that you understand how the terms are being used.

Gross Income in some policies can mean Gross Turnover/ Revenue and in others be an equivalent to Gross Profit.

Where items are replaced under property cover, would depreciation then be a saving?

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Non-cash expenses such as depreciation and amortisation do not in our view form part of claims calculation. However, this is quite complicated and may be handled differently in different cases. It may depend on the Material Damage claim and whether assets are written off and when they are replaced. We do not recommend that they are treated as an Uninsured Working Expense.

Would the difficulties in setting growth trend factors be solved by annual Business Interruption declarations which would take into account any unusual one off items and adjust premiums accordingly?

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Many policies have an adjustments clause e.g. ISR Mark IV. However a number of loss adjusters and insurers believe that a Policy can have both an under-insurance clause and an adjustments clause although the two are somewhat incongruous.

You would have to adjust every Policy every year and delete coinsurance but it is a good thought and possible future approach for the industry.

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