Mary E Furst CPA/ABV/CFF, CFE – RGL Forensics Dave Stephenson CPA, CPCU – Liberty Mutual

1. Business Interruption CAT Related Coverages & Claims Issues PCS Catastrophe Conference – Monday, April 29, 2013 Mary E Furst CPA/ABV/CFF, CFE – RGL Forensics Dave Stephenson CPA, CPCU – Liberty Mutual

2. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 CAT Property Concerns/Issues Preface: Business Continuity Planning – CAT • Can’t overstate importance of having plan • What events can happen? • Where is business likely vulnerable? • Have proper insurance coverages in place as component • Plan must be actionable, not just filed in drawer • Dry run; does it work?

3. Key CAT Related Coverages • Contingent Business Interruption (CBI)/Time Element (CTE) • Service Interruption • Extra/Additional Expense • Civil Authority/Ingress Egress • Wind • Quake • Flood • CAT Deductibles

4. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 CBI/CTE (a.k.a. Dependent Properties) • Understand Insured’s Supply Chain • Types of CBI Coverage: Suppliers, Recipients, Leading Locations • Peril Causing CBI Loss – must be covered on own policy • Important: “Direct” Suppliers vs. “All” Suppliers language

5. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Service Interruption • Waiting Period vs. Time Deductible • Distance from damage location restrictions (usually in miles) • # of Days covered often limited (typical: 21, 30, 90) • Peril causing interruption – must be covered on own policy • Policy language – sometimes will note “direct” providers only

6. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Extra/Additional Expense • Must be reasonable & necessary, and above normal • Pure Extra Expense vs. Expense-to-Reduce-Loss • Need Adequate Limits – Extra Expense Worksheet • Examples of Possible Reimbursable Extra Expenses • Renting nearby space – know what’s available • Using friendly competitors • Drop shipping to customers by your suppliers • Expediting Expense • Generators – have contract in place before events happen

7. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Definitions • Extra Expense – An expense over & above that which would have been incurred, but for the loss • Expediting Expense (also referred to as an extra expense) – An extra expense, but is limited to the savings to the business income loss measurement

8. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Civil Authority/Ingress Egress • Differences between 2 coverages • Distance from damage location restrictions (usually in miles) • # of Days covered often limited (typical: 21, 30, 90) • Peril causing interruption – must be covered on own policy • Is “snow” a covered peril? • Is a suggested closure (as opposed to mandated) covered?

9. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Wind/Named Storm/Hail • Policy may have sub-limit • Watch for “Wind” vs. “Named Storm” vs. “Hurricane” definitions • Sometimes policy will actually specify m.p.h. • Language issues normally deductible-related • Tornados a wind event but normally not specifically underwritten • Major premium/rate implications as a result of carrier CAT modeling

10. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Earthquake • Limited capacity in quake prone areas – smaller limits available • CA, HI, AK, New Madrid, Pacific NW (Puget Sound) • Larger accounts need DIC policies for additional limits • Recent growing emphasis on northeast quake • Carriers often reinsure exposures • Major premium/rate implications as a result of carrier CAT modeling • Especially San Francisco & Seattle areas • Sprinkler Leakage cover might be separate

11. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Flood • Limited capacity in high hazard areas • Almost always sub-limit • H.H. limits often intend to sit above NFIP policies ($500k/$500k/$100k) • Coverage limited on government sponsored flood policies • Larger accounts need DIC policies for additional limits • Carriers often reinsure exposures • Recent emphasis on flood related definitions • i.e. surge from Super Storm Sandy (definitions) • i.e. sewer backup covered? • Major premium/rate implications as a result of carrier CAT modeling

12. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 CAT Deductibles • Wind/Named Storm: % of Values at affected locations, w/ Mins • 5% FL/HI, 2% Tier 1 (including Houston) • Homeowners’ policies often have % deductible as well • May have larger flat deductible in Tier 1 north areas • Quake: % of Values in CA, New Madrid, PNW, w/ Mins • CA – typically 5%, NM and PNW are often 2% - 3% • Larger flat deductibles than basic AOP in low hazard areas • Flood: on some larger accounts, % of values in HH zones • If flat deductible, often $500,000 or $500/$500/$100 • Moderate zones (X500/B), often large flat such as $100k • Larger flat deductibles than basic AOP in low hazard areas • Hail: carriers may pursue higher deductibles in key areas such as TX

13. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Values / Deductibles • ISO Form – Retail • Business Income Values • Annual • Daily

14. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Example – Bill’s Bikes & Repair Shop • Profit & Loss Statement – Year Ended Dec-31-12 • Identify ISO defined expenses for value purposes • Input amounts into the Business Income Worksheet • Determine Daily Business Income Values • Calendar Days? • Operating Days?

15. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Example – Bill’s Bikes & Repair Shop • Business Income Value – • Based on Annual Value? • Based on loss period? • Short loss / Partial Loss Period • Longer loss Period / Total Closure

16. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #1 - CTE • The insured is a distributor of books. It sells books at book fairs on scheduled dates at various locations. Following Sandy, various schools and businesses were closed due to power outage, civil authority, wind damage and flooding.

17. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #1 – Considerations • Segregate venues by type of damage; reason for closure • Determine which causes of loss are covered • Match interruption dates with scheduled dates • Determine if missed book fairs were rescheduled (post-loss period make-up)

18. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #2 – CTE / Make-up The insured operates food service cafes. Following Sandy, the school it serviced was closed due to power outage and civil authority. The school was closed for 4 days, but will remain open 4 days longer to make up the days missed. What is the insured’s business income loss?

19. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #2 – Considerations • Define the period of indemnity. • Is the insurer entitled to make-up months following the period of indemnity?

20. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #3 – Reported Values • The insured is a cable company that installs and provides cable service to residents and businesses. Hundreds of trucks located in its service center were flooded. It reports values by location; the reported Business Income Value at the service center is $1 million – the estimated value of installation earnings. • The claimed business income loss includes: • Lost installation earnings • Lost cable / phone service / internet earnings for contracted periods • Lost additional service call earnings

21. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #3 – Considerations • What business income components should be considered associated with damage to the service center given the reported values? • What is the period of indemnity / interruption? • Who is the the direct customer for CTE purposes? If each downstream customer is subject to a $1,000 deductible, what is the likely loss?

22. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #4 – Indemnity Period • The insured provides a print and web-based magazine. It was without power for about 7 days. Before the event, 3 webinars were scheduled to take place 10 days after the loss event. Signups were significantly reduced during the 7 day outage period and when power was restored, leading up to the webinars. The webinars were cancelled due to the low turnout.

23. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #4 – Considerations • Reduced sign-ups – customers without power or maybe simply busy dealing with other life issues – personal and work related • Event that would have generated revenue is scheduled AFTER the power outage • What if webinar is rescheduled for some future date – like in 3 to 6 months?

24. Issues Surrounding Business Interruption Coverage PCS Catastrophe Conference – April 29, 2013 Case Study #5 – Reported Values / Mitigation Insured is a global company. It has a separate policy that covers Business Income losses caused by earthquakes for its Japan plant. It “sells” work-in-progress parts to an affiliated company located in Texas at a transfer price. The Japan plant is damaged in an earthquake, causing it to close for 4 months. Using other plants, outside vendors, and inventory – all located outside of Japan - it mitigates 75% of the lost sales to end user customers.

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