Business interruption policies exist to cover an insured following a loss incident. The two main issues are what is covered, and for how long. In this post we address the issue of the indemnity period…the period over which losses are insured.
There are generally two styles of indemnity periods which can be found in policies, often referred to based on an abbreviation of their main characteristic: Repair, Rebuild, Replace or Until Normal Operations.
What do these terms mean, and how do they impact the loss payable?
Repair, Rebuild, Replace
A typical business interruption policy wording which is of the Repair, Rebuild, Replace style will include the following definition, or a version of this definition, with regard to the indemnity period:
“Indemnity Period means the period beginning with the occurrence of the damage and ending not later than such length of time, not exceeding 12 calendar months, as would be required with exercise of due diligence and dispatch to rebuild, repair or replace the lost or damaged property.”
The definition means that regardless of the state of the business, once repairs are completed the indemnity period for any business interruption coverage ends. As a result, any losses incurred beyond this period would not be insured. Typically this type of wording is found in traditional style Gross Earnings type business interruption policies. However, in our experience, with the increase in hybrid style wordings this type of wording is becoming much less than it was even five years ago.
Although not specified in the definition above, the maximum indemnity period may be greater than 12 months if a longer indemnity period has been purchased by the insured and is specified on the Declarations Page.
Until Normal Operations
A typical business interruption policy wording which is of the Until Normal Operations style, will include the following definition, or a version of this definition, with regard to the indemnity period:
“Indemnity Period means the period beginning with the occurrence of the damage and ending not later than 12 consecutive calendar months (or such other period if so specified on the “Declarations Page” as the maximum indemnity period) thereafter during which the results of the business shall be affected in consequence of the damage.”
This style of wording means the business will be covered for any loss which occurs until such time as the maximum indemnity period is reached or the business has returned to its normal operating capacity. There is no specific consideration in the indemnity for the length of time taken to complete repairs.
This type of wording is most appropriate for businesses which may take a longer period of time to regain customers or normal sales levels after being closed due to damages.
Two policies in one
A variation on business interruption policies which we see on occasion is a two form business interruption coverage. These types of policies have one set of wording which covers the period from the occurrence of the damage to the completion of repairs, and an optional extension that covers the period from the completion of repairs until the business resumes normal operating levels.
When reviewing these types of policies, you will note the existence of both definitions discussed above. In situations such as this it is important to fully review both wordings and determine how they will interact with each other.
It is obvious that the indemnity period within a policy can drastically impact the loss payout. As such it is important that you are thorough in your understanding of the indemnity period, both at the time of purchase and following a loss incident.