Advanced Engineering (Sept 2021) - BI

BUSINESS INTERRUPTION
SEMINAR
23 rd September 2021
Machinery BI and Advanced
Loss of Profit
23rd September 2021
www.advantaglobal.com
CONTENTS
▪ The Role of the Forensic Accountant
▪ BI General Aspects
▪ ALoP Claims and Problem Areas
▪ Case Studies and Specific Issues

– Plastic Manufacturing – Trends Analysis
– Energy Generation – Valuation of PD & BI Loss Mitigation
– Mining – Post-loss Recovery
– Fertilizers Manufacturing – Savings
– Paper Production - Potential Double Indemnity PD & BI
– Renewable Energy Generation – Indemnity Period
THE ROLE OF THE FORENSIC ACCOUNTANT
The Forensic Accountant works in the adjusting team along

with the loss adjuster and other specialists such as lawyers,
salvage experts, etc. His specific functions within this team
are:
▪ Ascertaining and checking operating, accounting and

financial aspects
▪ Valuation of alternatives for mitigating the loss
▪ Sales analyses and forecasts
▪ Ascertaining lost production, inventories, sales and any

possibility of recovery
THE ROLE OF THE FORENSIC ACCOUNTANT
▪ Calculating the rate of Gross Margin
▪ Analysis of saved costs
▪ Analysis of increased cost of working and extraordinary

costs
BI GENERAL ASPECTS
▪ Business Interruption involves flow variables as opposed
to stock variables involved in Property Damage
▪ It is essentially related to the Profit and Loss Account

whereas Property Damage is related to Balance Sheet
▪ Comparison of projected scenario without loss vs actual

scenario with loss
▪ Assessing the BI loss involves making projections into

the future and establishing hypotheses
▪ Business Interruption is vital for many companies
BI GENERAL ASPECTS
▪ Requires macroeconomic analysis, industry analysis

and company-specific analysis
▪ The most complex to resolve for Claims Department:

requires external expertise
BI GENERAL ASPECTS
Evaluation of BI Loss and Adjustment
Based on meetings with the Insured and the analysis of the
requested information, the Adjuster must:
▪ Confirm whether the loss has affected the company’s results
▪ Establish Indemnity Period
▪ Determine Loss of Sales and / or Decrease in Stock Levels
▪ Calculate Loss of Gross Margin
▪ Assess Costs Incurred in Mitigating Business Interruption

BI GENERAL ASPECTS
Evaluation of BI Loss and Adjustment (cont’d)
▪ Determine Savings in Fixed Costs
▪ Calculate Business Interruption Loss
▪ Check the Adequacy of the Sum Insured
▪ Check potential Double Indemnity with PD Settlement
BI GENERAL ASPECTS
Policy Wordings
Historically, there have been different kinds of Business

Interruption Policies:
▪ Stoppage (% on material damage indemnity). In the 50’s.
▪ Loss of Production. In the 70’s.
▪ American (Gross Earnings): indemnifies proximate cause

losses - up to production recovery.
▪ English (Loss of Profits Policy): indemnifies consequential

losses.
ALoP / DSU CLAIMS
▪ Advanced Loss of Profits

▪ Delay in Start-Up
ALoP / DSU CLAIMS
▪ Arise due to delay in Scheduled Commercial

Operation Date (SCOD) or from mitigation
measures to avoid delay (ICoW)
▪ Caused by accidental physical damage
covered under Material Damage section
▪ Cover for financial loss from delay related
solely to covered event
▪ There is only one delay which results in
single claim
▪ ICoW incurred for sole purpose of avoiding /
reducing delay in SCOD
ALoP / DSU CLAIMS
▪ Need to establish pre-loss actual progress

against scheduled progress - monitoring
▪ Based upon accounting principles but
complex due to lack of historic data
▪ Client expects quick turn-around but true
performance should be based on actuals
▪ Debt service and fixed costs can be
established with more certainty
▪ Loss of gross earnings / gross profit is more
subjective
PROBLEM AREAS
▪ Establishing the actual loss related delay

▪ Interpretation of Defects Wordings
▪ Determining turnover / revenues
▪ Interim payments / Extra Expense Payments
/ ICoW / Incentive Payments
▪ Liquidated damages
PROBLEM AREAS
▪ Start of indemnity period – Scheduled

commencement of commercial operations
▪ Dealing with commissioning revenues
▪ Phased handover – structured DSU cover
▪ Extension of insurance period
ALoP / DSU SUM INSURED
▪ Gross Profit v. Fixed Costs incl. Debt Service

250
200
150 110
100 200
36
50 90
24 74
16
0 14
Revenues Revenues / Cost Gross Profit Fixed Costs incl. Debt

Breakdown Service
Net Profit Depreciation Interest Expense
Fixed Costs Variable Operating Costs
ALoP / DSU SUM INSURED
Required documentation to assess the adequacy

of DSU Sum Insured:
▪ Monthly financial budget for 2-3 years after the
commencement of commercial operations
including detailed breakdowns of:
– Revenues
– Costs (fixed, variable, interest expense, etc.)
– Loan Principal Repayments
▪ Detailed project programme indicating the
declared commencement of commercial
operations
CASE STUDIES
▪ Case studies with specific BI loss adjustment issues

and problem areas
PLASTIC MANUFACTURER
PUERTO RICO
FACT SHEET
▪ Business activity: Plastic manufacturer for

domestic market
▪ Date of Loss: 21st September 2017
▪ Loss description: PD and BI due to
Hurricane Maria (“HM”)
▪ BI Claim Value: USD 900,000
▪ BI Adjustment: USD 200,000
BACKGROUND
▪ HM caused wide-spread damage to the

whole of Puerto Rico
▪ 175 mph winds uprooted energy
infrastructure
▪ Humanitarian crisis
BACKGROUND
▪ Dip in the economic activity

▪ Leading Economy Index:
CHALLENGES
▪ HM caused physical damage to the

Insured’s property resulting in a loss of
production capacity
▪ Concurrently, HM caused wide area damage
resulting in a much lower economic activity
▪ Insured suffered loss of market / demand
▪ No energy during the first weeks post loss
▪ Gaps in insurance
BI ADJUSTMENT
▪ Trends adjustment / other circumstances

clause
▪ Used PR Economic Activity Index to project
Insured’s production and sales without the
damage to their property
PR Economic Activity Index 2017 - 2018
130
125
120
115
110
105
100
95
90
85
80
2017M9
2017M1
2017M2
2017M3
2017M4
2017M5
2017M6
2017M7
2017M8
2017M10
2017M11
2017M12
2018M1
2018M2
2018M3
2018M4
2018M5
2018M6
2018M7
2018M8
2018M9
2018M10
2018M11
2018M12
BI ADJUSTMENT
THERMAL POWER PLANT
SPAIN
FACT SHEET
▪ Business activity: Coal and furnace gas fuelled

power generation
▪ Date of Loss: 5th July 2016
▪ Loss description: MB and resultant BI
▪ BI Claim Value: EUR 28,000,000
▪ BI Adjustment: EUR 14,900,000
SELECTED CHALLENGES
▪ PD and BI Loss Mitigation
– Comparing various PD recovery options with the associated

shutdown periods
– Calculation of loss scenarios to minimise the combined loss
– Seasonality
SELECTED CHALLENGES
▪ Recovery options and loss minimisation analysis
– Option 1: Action wheel replacement

▪ PD estimate – EUR 2.25 million
▪ BI estimate – 120 day total shutdown
– Option 2: HP rotor + inner casing replacement

▪ PD estimate – EUR 8.0 million
▪ BI estimate – 45 day total shutdown + 220 additional days of ICoW (longer lead
time)
▪ Seasonality issue
▪ End of MIP issue
▪ Support with combined loss valuation - PD costs and

lead time assessment
MINING FACILITY
AFRICA
FACT SHEET
▪ Business activity: Mining and processing of

ore
▪ Date of Loss: 2014
▪ Loss description: PD and BI due to incident
at the processing facility
BACKGROUND
▪ Mining:
– Mining Plan
– Strip Ratio
– Financial impact - Capitalisation
– Site bottleneck at mining stage
▪ Processing:
– Metal ore transported to processing facility
– Ore Processed:
▪ Metal Concentrate Exported
▪ Other Material in Ore
BACKGROUND
▪ Normal Operation:
Mining Operation Waste
Other
Ore Processing Materials in
Ore
Metal
Concentrate
INSURED EVENT
▪ Insured processing facility shut down

▪ Expected repair period 7 Months
▪ Maximum indemnity period 18 months
INSURED EVENT
▪ Incident at Processing facility:
Other
Ore
Metal
Concentrate
INSURED EVENT
▪ Insured Modified Mining Plan:
Other
Ore
Metal
Concentrate
CHALLENGES
▪ Impact of change of mining plan:

– Total mining volume unchanged
– Mining mainly of waste
– Continue to capitalise costs
BI ADJUSTMENT
▪ Capitalised asset which would not be

available if the Insured event did not occur
▪ Valued at total Capitalised Fixed Costs

associated with the ore that would have
been mined ‘but for loss’ and that which was
mined during indemnity period
BI ADJUSTMENT
▪ Repair Complete:
– Due to additional mining of waste Insured could
mine more ore
– Make-up at processing facility
– Using part of the additional capitalised asset
BI ADJUSTMENT
▪ Following Repair at Processing facility:
Other
Ore
Metal
Concentrate
BI ADJUSTMENT
Ore Processed
450000
Maximum Indemnity Period Additional Fixed Cost Asset Capitalised
400000 Make-up
350000
300000
Loss of
250000
Processing
Volume
200000
150000
100000
50000
Actual but for loss
PVC AND FERTILISER
MANUFACTURER
POLAND
FACT SHEET
▪ Business activity: Production of PVC and

Fertilisers and Energy Generation
▪ Date of Loss: 15th June 2010
▪ Loss description: Fire in chlorine electrolysis
unit
BACKGROUND
▪ Complex and integrated processes

▪ Fire had a major impact on all production lines
▪ 18 month loss period
SELECTED CHALLENGES
▪ Savings in Fixed Costs
1. Depreciation charges of damaged equipment

2. Labour costs
DEPRECIATION
▪ Depreciation is fundamentally different from other items

taken as savings
▪ Depreciation represents an accounting entry to write off
the cost of fixed assets over a period of time – it does
not represent cash flow
▪ If an asset is damaged and ceases to bring future value,
the Insured writes it off completely and depreciation
charges stop
▪ Since Insurers provide an indemnity by replacement of
the machines on a reinstatement basis, the Insured
would be more than indemnified if the saving in
depreciation were not deducted
DEPRECIATION
▪ Accelerated vs. straight-line depreciation charges

▪ Accelerated depreciation – assets depreciate at a faster
rate during the beginning of the lifetime and slow down
near the end of the asset’s life
DEPRECIATION
▪ When Insured uses accelerated depreciation option, we

need to consider whether straight-line depreciation
would be more representative of the actual
‘consumption’ of the asset
▪ We need to assess the useful life of the damaged asset
and calculate the hypothetical straight-line depreciation
charge
LABOUR COSTS
▪ Given the difficult financial situation following the loss,

the management decided to reduce the usual Christmas
bonuses
▪ As the bonuses formed part of normal labour costs
included in the Insured’s gross profit, the reduction was
considered as a saving in fixed costs
PAPER PRODUCER
FINLAND
FACT SHEET
▪ Business activity: Production of paperboards for food

industry
▪ Date of Loss: 5th November 2013
▪ Loss description: TPL – hydraulic oil affecting
paperboard production
CHALLENGES
▪ Duplications in the PD and BI loss indemnity

▪ Overtime and normal labour costs included in the PD
loss adjustment
▪ Stock losses recognised at sales price value in the PD
loss adjustment
STOCK LOSS
▪ Fixed costs paid in stock loss - adjustment
– Must deduct fixed costs (and potentially net profit) paid in stock
loss in order to avoid double indemnity
– Must pay reference to fixed costs (and net profit) included in loss
of sales
– Subject to the reinstatement of stock at the end of the indemnity
period
– Must consider each case separately
INTERNAL LABOUR COSTS
▪ Internal labour costs paid in PD - adjustment
– Often, following the loss, the Insured uses internal labour to help
in cleaning and / or repair operations
– This labour is indemnified in the PD section of the Policy
– Normal internal labour costs paid under the PD Policy should also
be deducted from BI loss calculation in order to avoid duplication
– Must consider if overtime labour costs are part of the Insured’s
normal operating experience
BIOFUELLED COMBINED
HEAT AND POWER PLANT
SWEDEN
FACT SHEET
▪ Business activity: Heat and power generation

▪ Date of Loss: November 2015
▪ Loss description: Project under construction - faulty
design of lifting tool
▪ DSU Claim Value: EUR 14,500,000
▪ DSU Adjustment: EUR 7,000,000
SELECTED CHALLENGES
▪ Due to two fatalities, Police authority closed site for 14

days for investigations
▪ Insured claimed for 18 days shutdown during Christmas
and New Years’ period when repair activities ceased
▪ Vacations needed to be taken so that the employees’
overtime limits for the year were not exceeded
DSU ADJUSTMENT
▪ Prevention of Access extension – Insurers accepted the

14 day delays due to Police closing the site
▪ Vacation delays excluded as the Insured could not
demonstrate a direct link to the incident
Thank you for listening!
ADVANTA FORENSIC ACCOUNTANTS
For further information, please contact:
Advanta Global Services

Wakefield House
41 Trinity Square, London
EC3N 4DJ, UK
Phone: +442077024000
Fax: +442077024005
E-Mail: london@advantaglobal.com
Web: www.advantaglobal.com

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BUSINESS INTERRUPTION

23rd September 2021

▪ ALoP Claims and Problem Areas

▪ Case Studies and Specific Issues

The Forensic Accountant works in the adjusting team along

▪ Ascertaining and checking operating, accounting and

▪ Valuation of alternatives for mitigating the loss

▪ Sales analyses and forecasts

▪ Ascertaining lost production, inventories, sales and any

▪ Calculating the rate of Gross Margin

▪ Analysis of saved costs

▪ Analysis of increased cost of working and extraordinary

▪ It is essentially related to the Profit and Loss Account

▪ Comparison of projected scenario without loss vs actual

▪ Assessing the BI loss involves making projections into

▪ Business Interruption is vital for many companies

▪ Requires macroeconomic analysis, industry analysis

▪ The most complex to resolve for Claims Department:

▪ Confirm whether the loss has affected the company’s results

▪ Establish Indemnity Period

▪ Determine Loss of Sales and / or Decrease in Stock Levels

▪ Calculate Loss of Gross Margin

▪ Assess Costs Incurred in Mitigating Business Interruption

▪ Determine Savings in Fixed Costs

▪ Calculate Business Interruption Loss

▪ Check the Adequacy of the Sum Insured

▪ Check potential Double Indemnity with PD Settlement

Historically, there have been different kinds of Business

▪ Stoppage (% on material damage indemnity). In the 50’s.

▪ Loss of Production. In the 70’s.

▪ American (Gross Earnings): indemnifies proximate cause

▪ English (Loss of Profits Policy): indemnifies consequential

▪ Advanced Loss of Profits

▪ Arise due to delay in Scheduled Commercial

▪ Need to establish pre-loss actual progress

▪ Establishing the actual loss related delay

▪ Start of indemnity period – Scheduled

▪ Gross Profit v. Fixed Costs incl. Debt Service

Revenues Revenues / Cost Gross Profit Fixed Costs incl. Debt

Required documentation to assess the adequacy

▪ Case studies with specific BI loss adjustment issues

▪ Business activity: Plastic manufacturer for

▪ HM caused wide-spread damage to the

▪ Dip in the economic activity

▪ HM caused physical damage to the

▪ Trends adjustment / other circumstances

▪ Business activity: Coal and furnace gas fuelled

▪ PD and BI Loss Mitigation

– Comparing various PD recovery options with the associated

– Calculation of loss scenarios to minimise the combined loss

▪ Recovery options and loss minimisation analysis

– Option 1: Action wheel replacement

– Option 2: HP rotor + inner casing replacement

▪ Support with combined loss valuation - PD costs and

▪ Business activity: Mining and processing of

Mining Operation Waste

▪ Insured processing facility shut down

▪ Incident at Processing facility:

Mining Operation Waste

▪ Insured Modified Mining Plan:

Mining Operation Waste

▪ Impact of change of mining plan:

▪ Capitalised asset which would not be