In most parts of the world, Commercial Property policies, including those covering Downstream Energy and Power Generation, usually include a business interruption (BI) component with a time-limited indemnity period. (I explain this in more detail below.) In the pre-pandemic world, clients had many references for deciding the duration of these indemnity periods.
In today’s world, where so much remains uncertain, the estimates and assumptions clients use to set the length of an indemnity period may no longer apply. Thus, clients may want to reconsider this aspect of their Property policies.
An example from Australia
A few years ago, a powerful storm in Australia destroyed the production facilities and office complex used by one of our clients to support its business in the booming Asia-Pacific region. For this company, losing these assets, particularly the manufacturing/assembly plant, was a heavy blow. The company’s corporate risk manager told us that it “had never faced a loss of this magnitude” and, rightly so, emphasized the need to resolve the claim and get the operations back online as quickly as possible.
As is common when a facility of this magnitude is severely damaged or destroyed, an army of specialists mobilised to assess the loss, develop the rebuilding plan, secure the necessary materials, and then carry out the work. While many of the people involved were based in Australia, technical experts from the company’s European operations spent extensive time onsite overseeing different aspects of the work. And the machinery and components for the new production facility were sourced from myriad suppliers in Europe, Asia and North America.
How long will it take?
This company resumed production in Australia about one year after the storm. During that period, stage payments were made in accordance with the company’s Property policies to offset the BI losses it faced while getting the production lines back into operation and relocating staff to a new location.
This was not unusual. Most companies operating big, complex facilities like refineries, manufacturing/assembly operations or power generating plants have Property policies that cover BI losses incurred while production is offline due to an insurable event.
However, with Property policies having defined indemnity periods, this BI component isn’t open-ended; it comes with a time limit. (In some Property policies, the BI component is based on gross earnings and there is no indemnity period. While that approach is not uncommon in North America, the BI component of Property policies in the Asia-Pacific region where I’m based always includes an indemnity period.)
This “maximum indemnity period”—or MIP—is based on estimates and assumptions about how long different aspects of the repair/reconstruction effort will take. And when the MIP runs out, payments for BI losses that otherwise would be covered cease, even if the policy limit hasn’t been reached. In other words, the adequacy of the MIP, along with the sum insured, determines the level of protection a company has when it experiences extensive property damages. Also, equal weight should be given both to the amount of BI to insure and to the time needed to return to regular operation. (While these are discrete elements of the coverage, they understandably also are inter-related.)
Under (ab)normal circumstances
Fortunately, massive property losses are not common. Unfortunately, that also means companies have less experience carrying out the myriad tasks involved in repairing/rebuilding extensive, complex facilities. Things like:
• Demolition and debris removal on the existing site, or finding and procuring a new site
• Environmental remediation and permitting; this can be quite time-consuming with occupancies like, e.g., power plants, chemical works or refineries
• Securing new equipment, including specialised machinery and components.
Moreover, even when the damages are less severe, the time needed to replace specialised equipment or components can be considerable. Fabricating, transporting and installing new turbines in a power plant, for instance, typically takes at least several months.
If these or other tasks take longer than expected and the MIP expires, the financial support the company needs to get back to business could be lacking. Also, lengthy delays can severely impact customer relationships and curtail, if not halt, business development activities.
In pre-pandemic times, clients’ estimates and assumptions about how much time they could need to recover from a loss were predicated on “normal” circumstances. We’re not in that world anymore. And predictions about when we could return to something resembling pre-pandemic life remain uncertain.
In the admittedly narrow context of Property insurance, these uncertainties add another element that corporate risk managers and brokers need to consider as they review their insurance programmes for 2021 and beyond.
As of now, global commerce remains highly unsettled as numerous industry sectors experience massive swings in demand and output capabilities. How will this impact repair/rebuild projects and, in turn, the duration of the indemnity periods companies will need in these decidedly abnormal times?
Given factory shutdowns, supply chain disruptions, shipping delays, and so on, the short answer is to assume that everything will take vastly longer. For instance, specialised components available from a limited set of suppliers may not be available because the factories are only operating at partial capacity. And many countries are reporting delays in goods clearing customs. In sum, regardless of the company’s specific situation, every aspect of the project plan will need to be re-evaluated in light of likely delays.
A final thought: Longer repair/reconstruction periods and, by implication, more extended indemnity periods, also could have repercussions for insurers, especially in terms of their risk appetites and the limits and deductibles they can offer. While insurers’ risk appetites and limits/deductibles will depend, as always, on multiple factors including a client’s occupancy, risk quality, loss history and exposure to natural catastrophes, the length of the indemnity period could take on greater prominence in upcoming negotiations on Property policies.
Todd has 30+ years of experience in commercial P&C insurance, originally as a risk engineer, and subsequently as an underwriter. During his career, Todd has worked in the U.S., Australia and Singapore. In his current role, he is responsible for AXA XL’s Property and Energy portfolios in Asia-Pacific. Todd is based in Singapore and can be contacted at todd.wilhelm@axaxl.com.
This summary does not constitute an offer, solicitation or advertisement in any jurisdiction.
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