News Business Interruption claims

Improving contingent business Interruption claims outcomes

Aug 31, 2023
In recent times, Advanta Global has managed an ever-increasing number of Contingent Business Interruption (CBI) claims. Analysis in Global Risk Dialogue, published by Allianz in November 2022, suggests that CBI claims reached new heights in 2022. This likely exemplifies a growing number of companies that are purchasing CBI insurance in response to increasing global interconnectivity that is increasing vulnerability to customer and supply chain risk.

Carlos Garces, Director Advanta Global in Colombia agrees that “More and more companies in Colombia, and across Latin America, are purchasing CBI insurance for the first time”. He suggests “It’s important that the insured understands the nuances of the policy coverage and that they take steps to ensure they purchase appropriate levels of insurance”.

As Garces points out “it’s important to remember that CBI Insurance does not relate to physical damage to insured properties. Instead, the triggering event for a claim corresponds to an external incident that does not necessarily relate to the Insured's operation, for example interruption of access routes, damages suffered by suppliers or customers, and even due to specific or general civil authority orders. We have seen business interruptions resulting from incidents that have their initial origin thousands of kilometres away or that result from a combination of multiple causes. Therefore, the concept of efficient cause plays a fundamental role.”

Business interruption claims are by their very nature complicated, and the third-party nature of CBI insurance can pose additional claims adjusting challenges such as establishing causation, sub limits, and policy wording nuances. CBI insurance clauses must be accompanied by a comprehensive contractual framework that allows for precise identification of the elements that trigger the coverage, the scope of the concepts and words used in the text, and particularly the events that are not considered within the coverage.

Most CBI policies have a condition that places the onus on the Insured to prove that the policy has been triggered by a loss and the date the business interruption started. This means establishing the proximate cause of the loss whether that is fire, flood, or some other insured peril. As Garces explains “This can require a customer or supplier to provide access to information or data that, without pre-agreed protocols, they may be reluctant to do. This can delay the claims handling process.”

It is then not uncommon for CBI limits to be inadequate, with the claim far exceeding the sum insured. Garces suggests “There are a couple of reasons for this. Many firms focus on key or tier one suppliers where information is readily available, and firms underestimate the interconnectivity within industries and regions.”

There is no standard policy wording for CBI insurance and sometimes key clauses are missing or perhaps unclear. For example, many firms count joint ventures and associated companies as part of their customer and supplier chain. When there are two or more interdependent sites the policy should include an Interdependency Clause to be able to recover end-to-end margins. According to Garces “It can be a major source of frustration for the Insured if the cover does not function in the way they expected.”

To overcome these and other challenges the Insured should: 1) develop claims handling protocols that include a requirement for customers and suppliers to provide information, especially key and close relationships; and 2) develop loss scenarios to consider the limits of indemnity and to examine how the policy will respond to different incidents.

Garces recommends “The Insured work with a Loss Adjuster, Forensic Accountant, and Business & Market Analyst who are familiar with the Insured and their industry and can use their experience with similar losses. They can help the Insured develop more robust loss scenarios and mitigation methods, help them understand some of the nuances of the cover and address potential contentious wording issues before a claim occurs.”

Carlos Garces

Carlos Garces has almost 15 years’ experience in the Colombian insurance and legal industry. Before joining Advanta, he held a senior managerial position at a leading international insurance company where he was responsible for handling major and complex claims.