Zurich Insider takes a pictorial look into the workings of a major property and business interruption claim.
This fictional scenario surrounding a fire at a festive biscuit manufacturing company follows the process from first notification to final settlement, highlighting some of the common problems that can be encountered and the actions taken to minimise the impact to the business.
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McKinney Foods is a large manufacturing company. It is particularly known for its gingerbread biscuits, which are stocked in most major supermarkets. The business operates from 30 premises worldwide, including three factory sites in the UK. McKinney Foods has a total property declared value in excess of £200m across all sites.
On 24 March 2013, a major fire occurs at one of the UK factories. The fire brigade attends quickly, but due to a lack of information about the building, their efforts are concentrated on preventing the blaze spreading to surrounding properties. Once extinguished, the fire has caused severe damage to the building and its contents. Resulting investigations identify the cause to be an electrical fault in one of the packaging machines.
The company promptly calls its insurance broker, who immediately informs Zurich. Zurich’s Major Loss Team appoints a specialist loss adjuster and quickly attends the site. The Major Loss Team has a wealth of experience of serious incidents and is able to guide customers through the claims process and discuss how to minimise the impact to their business. An early claims estimate is conducted; it is thought the total loss is likely to exceed £20m - £7m property damage and £13m through business interruption.
It soon becomes apparent that all of the factory’s stock and work in progress is unsalvageable, including a number of orders being processed in time for the busy Christmas period. Machinery is assessed to determine whether it can be repaired or if replacements are required. The fire has caused extensive damage and much of the machinery will need to be replaced. As some key machinery is bespoke, manufacturers are quickly engaged to minimise the interruption to the business.
The building is damaged beyond repair. The company decides to have the factory rebuilt. It is a major production hub and in a prime location for serving a number of major customers. Site clearance begins, and surveyors and architects are engaged to begin rebuilding the factory. The primary focus is on returning the business to its former production capacity to minimise the disruption to its customers.
The specialist loss adjuster assesses the various contractual obligations the company has to its customers and suppliers. In particular, the adjuster identifies some large customer orders for the upcoming Christmas period. The terms of the contract stipulate that the company will incur financial penalties for each day delivery is delayed. It is established that the business’s other two factory sites are only capable of picking up 20% of the lost production capacity, putting it at risk of not meeting its orders.
Fortunately, the company has created a comprehensive business continuity plan. This plan includes an arrangement with a competitor to subcontract additional production capacity. With the other factory sites still operating normally, this will allow the business to reach 85% of its former production levels, albeit at an increased cost. The increased cost is determined by the Major Loss Team to be within the economic limit, so is approved. The economic limit states that an increased cost of working must not exceed the reduction avoided; no more than a pound should be spent to save a pound.
The subcontractor has not been able to meet its deadline and the company cannot fulfil a major supermarket’s order by the agreed time. For the delay in delivery, they incur a contractual penalty of £15,000 (as this increased cost is not incurred with the sole purpose of avoiding a reduction in turnover, it is excluded under the main heads of cover). Fortunately, Zurich’s policy includes an extension for ‘fines, penalties and damages’ that provides cover for such costs, subject to an inner limit of indemnity.
The rebuild encounters unexpected planning delays and construction is postponed. Had the company been insured on a 12-month indemnity period, business interruption cover would cease before the rebuild was complete. This would leave the company without financial support to compensate for increased costs and lost revenues. However, at last year’s renewal, under the advice of their broker, they gave instructions to increase the indemnity period to 24 months. The Major Loss Team is therefore able to issue an interim payment to assist with cash flow and minimise the interruption to the business.
As the rebuild nears completion, Zurich’s Risk Engineering Team works with the company’s key staff to strengthen the business’s risk management approach. In particular, a more stringent maintenance programme is implemented across all 30 sites to reduce machinery-related risks. During the reinstatement process, the decision was taken to install a more advanced fire suppression system. The business continuity plan is reviewed to address the subcontractor issues experienced during the recent interruption. An ‘emergency folder’ is also created for each site containing key information that can help fire services more effectively tackle a blaze at the premises.
After 14 months, the factory is fully reinstated. It takes another two months for production to reach former levels, and a further two months for the company to return to its previous level of profitability. In total, it has taken 18 months for the business to fully recover. Zurich’s Major Loss Team continues to work with the company and its broker to facilitate a final settlement of the claim and support the business in its recovery. The proactive solutions proposed by Zurich’s Major Loss Team have been successful in mitigating the loss, helping McKinney Foods retain all of its major customers.
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