Companies doing business internationally must comply with local regulations typically requiring them to purchase insurance from admitted insurance companies in countries where they operate. Sometimes, these insurance purchases can be challenging; seemingly subtle differences in coverage elections can have dramatic effects on claim recoveries.
Consider these examples:
Business interruption “gross earnings” versus “gross profits.” For manufacturers, the gross earnings form covers “net sales value of lost production” less non-continuing expenses; the policy pays when an insured loss event causes a measurable decrease in production output resulting in a loss of profits, but excludes losses involving damage to finished goods inventory. In contrast, the gross profits form requires insureds to prove they lost sales due to the interruption. If an insured property loss occurs in countries with a coincidental economic downturn, businesses with large inventories must prove any lost sales were due to the incident rather than economic factors. Consequently, insured loss amounts and related insurance recoveries may differ significantly under the two forms.
Period of liability. Another key difference in the two forms involves the duration of a business interruption loss following a triggering event, such as fire or flood. Under the gross profit form the maximum period may be 365 days; there is no business interruption insurance recovery beyond then. However, the gross earnings form defines the business interruption period of liability as the time it takes to repair or replace damaged property, which can extend more than a year.
Damaged equipment. In many standard policies, insurance companies have to confirm that equipment is damaged beyond repair, possibly resulting in settlement delays, disputes and potential shortfalls in recovery. However, some property policies let insureds alone (using reasonable discretion) judge that equipment is damaged, which the insurer then verifies. This can streamline the adjustment process and speed the recovery.
Capital expenditures. Although coverages typically vary by policy, a capital expenditure clause enables insureds to recover full replacement cost for a damaged asset without technically rebuilding or replacing it, provided they use the proceeds for other capital expenditures in the same country or other parts of the world. Multinationals find this feature valuable when an insured event affects their operations, but choose not to rebuild at the affected location.
Beyond these examples, international insurance policies can be complex; to make sure you have adequate protection, check your policies with your risk manager, insurance advisor, or attorney.
Carlos Moran is a director in Aon’s Claim Preparation, Property Claims Advocacy and Valuations group, which provides global expertise in claims advocacy, claims preparation, and pre-loss asset and business interruption valuation.