Is your Indemnity Period adequate enough?

Is your Indemnity Period enough?

Is the Indemnity Period in your Business Interruption Insurance adequate?

Quite likely it is not. When discussing with our clients what should be appropriate, they are often un-familiar in what would be involved in dealing with a worst case scenario if their business was out of action for a while. To imagine that following a fire that they could be back up and running, generating the equivalent income that they were before a disaster anything longer than six months seems un-realistic. But it is not and we provide the following example of a claim showing in chronological

A Fire Claim on a Business

5 March 2010 – The insurance policy is renewed and an indemnity period of 6 months is specified in the policy.  Cover for Claim Preparation Costs is restricted to the Loss of Gross Profit claim not the Material Damage claim.

20 April 2010– A fire destroyed part of the building, stock and contents. A large proportion of the sales area became unusable. The indemnity period commences.


21 April 2010– Insurers are notified and loss adjusters appointed. Claim preparers are engaged but due to the restricted cover the role is limited to preparation of the Business Interruption claim.


26 April 2010– Debris is removed. The damaged section of the building is isolated, the remaining sales area reorganised to maximise customer traffic. Sign-writing is completed advising customers that trading is continuing. In reality sales cannot return to normal at least until the building is reinstated.


27 April 2010– Loss adjusters introduce a builder to the Insured.


5 June 2010– Loss adjusters advise that the building assessment has been completed. A specification was not agreed with the Insured prior to the assessment and the scope of works is found to be inadequate.


June 2010– it becomes evident that the foundations beneath the shop are unstable due to the amount of water used to extinguish the blaze. This requires extensive new building works and adjustments to the rectification.


June 2010 to July 2010– Engineers are engaged to provide an opinion on rectification needs and costs. Surveyor and Architect engaged to make adjustments to the building design to meet with more recent local council by-laws. Meetings continue with all parties in relation to what is needed to fix the damage and reinstate the building to something similar meeting town planning laws.


2 July 2010– damaged stock is removed for insurers to recover any salvage value.


August 2010– An alternative builder is sought as the initial builder becomes unavailable due to other work being available.


17 September 2010 – Building plans completed and approved by Insurer and Loss adjuster


11 October 2010– Council rejects plans and asks for amendments.



20 October 2010– the maximum indemnity period of 6 months expires. Any loss of Profit beyond this date is NOT covered by the insurance policy.


2 November 2010– Council finally approves plans for Building work needed


17 November 2010– New Builder found by Loss Adjuster but cannot start for one month.


17 December 2010– Building works started and expected to be completed by May 2011 if there is no other delay from the builder.


Christmas 2010 trade is severely affected by Building still being damaged


25 June 2011– Building works completed despite weather delaying the completion date. Additional expenses made to advertise and inform the public of themselves being fully back in business.


20 October 2011– Turnover reaches 80% of Pre-claim revenues


31 January 2012– Turnover finally starts to exceed the income generated before the fire.


The benefit of hindsight.

A six month indemnity period is often insufficient for sales to return to normal. It is not unusual for sales not to return to the pre-claim level for many months after. For most businesses, with all the unexpected influences and delays that can occur outside the Insured’s control, you need a minimum of 24 Months Indemnity period on the policy with a Limit of Liability to reflect this amount.


Many other factors contribute to delays and they are not unusual. Finding out the damage was worse than first thought, having to engage professionals (subject to availability) to re-design or re-draft the reinstatement repairs needed. Builders are subject to availability and vetting by Loss Adjusters. Some plans depending on the extent of damage have to be approved by Local Government in laws that vary all around Australia. External Weather events etc can delay rebuild.


Extra expenses involved in seeking to return turnover to pre-event figures can be claimed under an Additional Increased Cost of Working section that can be included on the policy.


Cover for Claim Preparation Costs should be taken in relation to both the property and business interruption loss to enable the Loss Adjusters to be actively involved in both the Material Damage and Business Interruption sides of the claim.


We have access to specific Insurer’s calculators for the most accurate calculation of the sum insured needed for Business Interruption, but the Indemnity period is not easy to calculate. We have only the benefit of hindsight on previous claims to form the basis of what is realistically needed.