Conditions in order for the Business Interruption or Consequential Loss cover to be triggered

In our opinion, there are three conditions and moreover, it is necessary that all three are met for there to be any indemnity payable under this cover.

The first condition is that the Material Damage that gave rise to the Consequential Loss being claimed, is covered by an Insurance Policy.  This has its logic and rationale since otherwise, if the Insured does not have the resources to repair the damage, the maximum indemnity period prescribed in the Consequential Loss Policy would always be exhausted.

The second is that production activities are resumed after the loss event.  This condition is likewise well founded because otherwise, it could be the case of a businessman whose company is not doing well, who burns it down so as to collect the indemnity for both the Material Damage as well as the Consequential Loss.  If fraud cannot be proven, at least with this second condition you avoid the Consequential Loss having to be indemnified under the Policy.

Lastly, the most important condition and something that is not usually explained to the Insured when contracting the Policy, is that the loss event must affect the company’s financial results.  Thus it is necessary that the loss event has an impact upon the company’s income, or in other words, that there is a loss of sales or that there is an affect upon the costs, i.e. that it causes extra costs.  Both are things that usually occur with major claims.

In many claims where the Company’s inventory or stocks of finished goods is enough for several weeks and their sales capacity is less than their production capacity, which tends to happen in times of crisis, it is pretty unlikely that a loss event with a short duration, of less than a week, will have an impact upon the financial results of the Company.  Therefore, it is absurd to impose Deductibles of just a few days for businesses with high levels of stocks and whose production capacity is greater than their sales capacity.

To avoid the Insureds from subsequently feeling cheated, this third condition must be clearly explained at the time of negotiating the Policy and make them see how important it is that it should be designed for major claims since the smaller ones will hardly affect their financial results.  Furthermore, imposing higher Deductibles in these cases, extending to weeks rather than days, significantly reduces the cost of the Policy.  Unfortunately, this is not normally done and mistakenly they attempt to lower the cost of the Policy by reducing the Maximum Indemnity Period, instead of raising the Deductibles.

At VANTEVO CLAIMS ADVISORS, given our extensive experience with this type of claim, we can help the Insureds and Brokers to set a correct Sum Insured, an adequate Maximum Indemnity Period, and a Deductible that lowers the cost of the Policy but without reducing the cover for the Insured.  To sum up, Business Interruption or Consequential Loss Policies must be drafted with large claims in mind, not the smaller ones.

The problem with the lack of clarity regarding the time Deductible in Loss of Profits or Consequential Loss Policies

Whenever the Loss of Profits or Consequential Loss policies issued by the London Market establish a Deductible or Excess  of, say 10 days, this is construed as being the first 10 days, and so there is no need to define just how those 10 days must be interpreted.

However, in Spain and other countries this is not the case, and the policies ought to specify just how the Deductible is to be considered:  Do we take the first 10 days?  Do we apply them pro-rata to the indemnity period?  Are they 10 calendar days or 10 working days?  Depending upon how it is interpreted, we will get a different indemnity figure.

It is quite shocking that the vast majority of Spanish Loss of Profits or Consequential Loss policies do not define the Deductible or Excess.  That is to say, they do not specify just how it must be applied and this prejudices the Insurers issuing them.

In effect the Spanish Law 50/80 on Insurance Contract, and consequently the courts, construe that such a lack of definition cannot prejudice the Insureds and therefore it must be applied in the way that is most beneficial for the latter.

Our experience as Loss Adjusters leads us to recommend that Insurers and Brokers should define how the time Deductible or Excess is to be applied.  Very often we have proven that such vagueness has led to the breakdown or deterioration in the relationships between Insureds and Insurers, and due to the lack of clarity concerning the time Deductible, it has taken longer to settle the claim and many have even ended up in the Courts.

It is the opinion of VANTEVO CLAIMS ADVISORS that, since the Insurance Policy is a standard form contract, entered into voluntarily and in good faith between the parties, such lack of precision ought to be avoided as it is a source of problems and conflicts when it comes to adjusting claims under Loss of Profits / Consequential Loss policies in Spain.

It is strange how after so many bad experiences, most of the Spanish Policies still continue to fail to specify just how the time Deductible or Excess must be considered.  It is VANTEVO’s suggestion that instead of stating “10 days” they should state “10 working days and applied pro rata”.  We are sure that this would avoid many problems when adjusting this type of loss in our country.