Usually in this type of Policy, no mention is made of underinsurance, since with the “Automatic Increase” Clause, which tends to be set at between 20-40%, this is avoided in a large percentage of claims. It should be remembered that this Clause requires that the Sum Insured be reviewed annually, once the previous year’s accounts have been closed, and is something which sometimes is not done.
Where there are problems is with the Maximum Indemnity Periods (MIP), since these tend not to exceed 12 months and there are many companies whose essential machinery has lead times of between 12 and 18 months, and therefore these periods often are not long enough. As is known, under the standard English wording, the Indemnity Period ends when sales are recovered and so the worst case loss scenario that could occur in a risk must always be borne in mind at the time of calculating the Maximum Indemnity Period.
As regards the Deductible, this too is frequently inadequate, since we often come across companies that have 4, 6 or 8 weeks of stocks of finished products yet have Deductibles of 1-2 days, and so with short term losses it is very unlikely that there will be any loss of income.
Likewise, if there is idle capacity, that is to say, if the production capacity is greater than the sales capacity, which is what normally happens in times of crisis, it is unlikely that there will be any extra costs, which means that the company’s results are not affected and so the policy does not pay any amount. In the above cases, the Deductible should be established in weeks rather than in days.
On the other hand, in businesses such as a bakery, a restaurant, a wind farm, etc. the Deductible should be minimum or nil, since from the very first day of the shutdown there are lost sales that are often irrecoverable.
In Spain, we have an added problem in this type of policy with the Deductible, which many times is imprecise. It is not specified how the time deductible ought to be applied and that is detrimental to the Insurers, since Spanish Insurance Law establishes that in those cases it must be applied in the way that is most favourable for the Insured.
At VANTEVO CLAIMS ADVISORS we have experts in this type of cover who can assist Insureds and Brokers to design a Consequential Loss Policy that is adjusted to the risk that they wish to insure.