Over time, the scope of property coverage has expanded from the days of simple fire insurance to broad forms that insure against a wide range of perils and that not only protect physical property, but include Business Interruption (BI) and other “time element” coverages as well.
And as business owners have looked to specialty products such as Cyber and Environmental coverage to protect their property and operations from an even wider range of hazards, their interest in adding time-element coverage to those forms has also grown.
“We have many clients that are justifiably concerned about cyber loss, because in many cases if they have disruption and lose business, that business doesn't come back,” says Emy R. Donavan, national practice leader of cyber, technology, media, and specialty PI for Allianz Global Corporate & Specialty — Financial Lines North America.
Cyber-related disruptions to business come in many forms, from breaches that take down systems to denial-of-service attacks that clog a company's Web-traffic pipeline and prevent it from doing business. “Risk factors are changing continuously,” Donovan says.
Among the newer coverages in the Cyber-BI space is systems failure coverage, which doesn't require a breach or outside attack to trigger.
“Systems failure coverage is essentially enterprise coverage against disruption. Even if the janitor trips over a plug and disconnects the server, that can be covered,” Donavan explains. “System integration projects are also a potential hazard, because when companies flip the switch on a new system, if it doesn't work exactly as expected it can affect their ability to generate income and create an impairment loss.”
Donavan expects continued coverage innovation in BI as the Cyber market develops. “Initially the Cyber space was dominated by E&O underwriters with a casualty mindset. Now we are seeing property underwriters come over to the Cyber side, and they are bringing a property mindset with them,” she says.
In Environmental insurance, business income losses can be triggered by conditions that arise long after property damage is repaired. For instance, a storm that produces water infiltration can cause mold issues that come to light later. “The types of business income losses we’ve seen track similarly to other losses from a pollution incident. Mold and Legionella are things we’re paying out on,” says John O’Brien, CEO of Ironshore Environmental.
For BI losses, Ironshore's policy provides protection against pollution incidents within a specified radius of the insured's location, a coverage extension the company developed in the wake of the BP oil spill.
“When oil came onshore after the BP spill, people didn't want to visit hotels in the area even if their beach wasn't directly affected,” O’Brien notes. “Site-pollution policies only cover you if you’re legally liable, which wasn't the case for hotels that lost business. With our policy, pollution that comes into your radius can trigger time-element coverage.”
A man walks past the charred remains of new cars at a parking lot near the site of an explosion at a warehouse in Tianjin, on Aug. 13, 2015. (Photo: Ng Han Guan/AP Photo)
Interest in pollution-caused Business Interruption has grown recently in the real estate sector due to increased construction activity. O’Brien says Ironshore is selling a good deal of coverage to real estate investment trusts (REITs).
“Apartment and commercial REITs are both big buyers,” he says. “Unlike manufacturing risks, which might have inventory in stock to draw from or that can find a different location or supplier if there is a pollution loss, the income of a REIT is directly tied to the usability of a particular location.”
O’Brien says that there is opportunity for brokers to emphasize BI coverage in making an Environmental insurance sale to any commercial customer.
“Business income related to pollution, and pollution in general, is definitely a coverage that's under-asked for,” he says. “Rarely is it among the top 10 points a prospect brings up. However, when you look at the breadth of Environmental coverage, it extends into many areas — transportation, non-owned locations, third parties, products — that make it a valuable part of a company's risk management strategy.”
High interest in CBI
In both specialty and standard property lines, interest among buyers remains elevated for Contingent Business Income (CBI) coverage. While BI covers lost income and added expenses when an owned property is damaged, CBI goes a level deeper, insuring against income loss resulting from damage to property at a supplier, vendor or other property a business is dependent on.
“Interest in CBI spiked after the Japan earthquake and Thailand floods, and it hasn't diminished,” says Bob Shine, chief underwriting officer, Americas region, XL Catlin.
The Tianjin Port explosion of 2015 is the most recent catastrophe with the potential to create CBI claim activity and spur purchasing interest. On Aug. 12, a warehouse facility housing large amounts of hazardous chemicals in the port of Tianjin erupted in two blasts, the second equivalent to the force of 21 tons of TNT. The blasts destroyed shipping containers, new cars, equipment and terminal buildings, along with infrastructure. According to initial estimates from Guy Carpenter, insured property losses could be between $1.6 billion and $3.3 billion before CBI losses are even considered.
CBI coverage may be tied to named properties or provided on an unnamed, blanket basis. Buyers would prefer to have a blanket of protection over any suppliers they might use today or in the future, whereas underwriters are more comfortable tying coverage to a named location they can inspect and assess. They are also more cautious of companies with global supply chains, such as auto manufacturers or tech firms, and expect those companies to have solid business continuation plans that include contingencies for alternate suppliers.
“The more information you can provide to underwriters regarding your supply chain and the exposures you have, the better you will be able to get limits,” says Greg DiPrato, senior vice president of Lockton's global property practice.
Michele Sansone, president of the North America property insurance business for XL Catlin, says that in a best-case scenario, “we can offer $50 million to $60 million in unnamed [blanket] CBI coverage. With named coverage, we can write up to $1 billion because we underwrite it like an owned location.” However, she adds that most named-location limits the company insures are under $500 million.
From a risk management perspective, one upside of the events of recent years is the development of a better understanding of supply chain management. “Risk managers are a lot more attuned to their supply chain, doing more due diligence and looking for weak links,” says DiPrato. “We’ve seen a rise in engineering operations that will do deep dives into supply chain risk and CBI exposure.”
When written on a property form, CBI coverage is triggered by physical damage stemming from a covered cause of loss to dependent property. Although CBI is available on specialty lines forms, it's a tougher sell than on standard property.
“It's difficult enough to get an insured to think about buying time-element pollution coverage for their own facility. When you start to extrapolate [the exposure] to a third party, you cease getting people nodding their heads and you start to get people looking at their watches,” says O’Brien. “We are still trying to get people to concentrate on their own site.”
Although claim severity hasn't yet been high enough to sound alarm bells, DiPrato says that earthquakes in Japan and floods in Thailand “awakened” underwriters and buyers to the potential of CBI loss and the need to insure it. As more businesses purchase more insurance, the potential for increased severity is tied to the next catastrophe affecting the global supply chain.
“There are so many policies that cover this exposure,” adds Donavan. “Just because the losses haven't been huge, it doesn't mean they are not coming down the pike. We’re waiting for the other shoe to drop.”
Essential BI terminology
Business income: The net income (net profit or loss before income taxes) that would have been earned by the insured and the insured's continuing normal operating expenses incurred, including payroll.
Actual loss sustained: Coverage applies to the “actual loss sustained” by the insured as a result of a covered loss.
Period of restoration: The length of time required to rebuild, repair or replace the damaged or destroyed property after physical loss or damage occurs.
Extra expense: The necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril.
Contingent Business Interruption (CBI) coverage: This covers an insured's income loss resulting from covered loss, damage or destruction of property owned by others on which an insured is dependent, such as the insured's suppliers or those who receive the insured's products and services.
Service interruption: Coverage for an insured for direct physical loss, damage or destruction to electrical, steam, gas, water, sewer, telephone or any other utility or service including transmission lines and related plants, substations and equipment of suppliers of such services.
Leader property: An endorsement that provides coverage to the insured for direct physical loss, damage or destruction to property not owned or operated by the insured, located within the stated distance to an insured's property or business, but which attracts business to the insured.
Interruption by civil or military authority coverage: Provided for the actual loss sustained by the insured during the length of time when access to such described premises is specifically prohibited by order of civil authority as a direct result of covered damage.
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