A policy that buys time

Jamaica Observer | 2025-12-03 | Original Article

THE aftermath of a major storm like Hurricane Melissa is dominated by visible repairs: roofs need replacing, roads need clearing, slowly we rebuild the things in our lives. This is often the work of property insurance. However, for businesses the greatest loss is often not the one we see, but an invisible loss of revenue that begins the moment the doors close, and continues until the business is fully operational again. This is the realm of business interruption (“BI”) insurance, formerly known as consequential loss or loss of profits insurance. BI is not merely a top-up to your property policy — it can be a financial lifeline that pays the bills while the physical repairs are underway.   What is Business Interruption Insurance and When is it Triggered? A business owner whose income has stopped due to a widespread power outage or who is cut off by landslides or damaged roads — but whose property remains structurally sound — is often frustrated. A business interruption policy, like all other insurance, seeks to make the insured whole. What position would this business be in but for a specific loss? Standard BI coverage is additional to a business’s property insurance policy. Importantly, it will be triggered only if an insured peril — like windstorm, fire, or flood — causes physical damage to the insured property, which in turn leads to the interruption of the business.   The Complex Work of Defining Your Loss The sum insured under a BI policy is fundamentally different from a property policy’s replacement cost. Unlike insuring a house or car wherein the replacement value is relatively static, the fortunes of a business can fluctuate. Remember, the true value of the BI loss needs to account for what would have happened but for a given loss; it requires looking a bit into the future. A loss adjuster, appointed by the insurer, is an expert responsible for conducting this forward-looking analysis. Among other things they will factor in: • Projected Trends – Did your business show strong growth before the storm? That increase must be factored into the loss calculation, not just last year’s static numbers. • Wider Area Damage – If the entire destination (for example, the tourism sector in a specific parish) has been depressed by the hurricane, the payout aims to restore you to the lower level of profit you would have earned in the depressed market, not the profit from a normal, healthy year. Similarly, small property claims can sometimes mask much larger losses. Consider a hotel: A small fire in the laundry room or the main kitchen might result in a modest property damage claim. However, if the hotel cannot function without those critical components it cannot accept guests. The resulting business interruption claim could therefore be disproportionately high. A BI policy can even apply if a business was not making a profit before the storm. The insurer’s obligation is to cover the unavoidable fixed expenses (like payroll and rent) to prevent the business from incurring even greater financial losses, which could force liquidation. A cyclical business on hard times can use BI insurance to see it through. This complexity underscores the need for thorough documentation and professional guidance. A successful BI claim will turn on these numbers and their interpretation.   Common Missteps for the Unwary Insured 1) The Indemnity Period Trap The indemnity period is the maximum length of time the insurer will pay for your loss. Twelve months is standard, but in a post-catastrophe economy where contractors and materials are scarce, the time to recover often exceeds one year. If your rebuilding takes 18 months but your policy only covers 12, the final six months’ loss is entirely yours. You may want to insure for a period that accounts for maximum possible disruption, perhaps 18 or 24 months.   2) The Dreaded “Average Clause” There can be severe financial consequences for under-declaration of risk, which triggers the average clause. This clause reduces the amount of a claim payout if the insured asset is found to be underinsured at the time of the loss. For a given BI Policy, the amount “at risk” is the projected annual gross profit — as defined by the policy itself — for the entire indemnity period starting from the inception of the policy. This is usually anywhere between 12 and 24 months. Let us say you took out a BI policy for $50m. If your business was booming just before the loss then a loss adjuster may determine the actual projected gross profit for the policy year was $100m. Therefore, the actual value at risk for the insurer was twice the amount you insured for and you would thus be 50% underinsured. Consequently, by virtue of the average clause the insurer will only pay half of your claim, regardless of the size of the loss itself. An adjustment clause which allows the sum insured to be reviewed and decreased or increased, based on actual business results, is helpful managing this dynamic, forward-looking risk.   Moving Forward, What Can I do? As you prepare your claim or review your policy, think like an underwriter: Document everything. If you have an insured loss and a BI policy, keep track of your costs — not just physical damage, but all fixed costs you continue to incur. Check your policy wording. Do you have coverage for public utilities (JPS/NWC failure) or denial of access (road blockage)? If not, make sure they are included in your next renewal. Seek good advice. This is a complicated and complex area of insurance.so good accounting advice is critical. Good legal counsel can help you navigate the complexity of a BI claim, if and when a claim has to be made, however seeking out advice from insurance experts prior to a loss will put you in the best position to weather any given storm.   Adam Moss is a consultant at Myers, Fletcher & Gordon and is a member of the firm’s Litigation Department. Adam may be contacted via adam.moss@mfg.com.jm or through the firm’s website at www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.