Time Element Select?: The FM Global "Sleep-Easy" clause

Without thinking too much, can you tell me what you think this little girl will end up choosing?

No, NOT YOU, come on... The kid!

OK, let's make it more business-like: if you had to make the choice between receiving ￡100 and ￡200, what would you choose?

It's not a tricky question; this is the situation in which FM Global clients that experience a Business Interruption loss find themselves.

In commercial property insurance policies, the Business Interruption (BI) cover indemnifies for the loss of profits resulting from an insured property damage loss. The amount indemnified would depend from the wording and specific clauses, but basically it would come down to whether the BI cover is on a Gross Earnings or Gross Profit basis.

What is the difference?

In Gross Earnings (GE) policies, which are traditionally prevalent in North America, the focus in on the loss of revenues directly relating to the loss of production. The cover would pay your loss of profits during the time your plant is being rebuilt (restoration time). As such, this cover does not have a time limit. If it takes you 37 months to restore production to the pre-loss status, that's what the GE cover would cover you for. Gross Profit (GP), which is more typically European, covers instead the total loss of profit during and after the restoration, including things like loss of contracts, loss of market share or simply the inability to sell the product that you can actually produce once your plant is back in business. However, this is limited in time, i.e. there is a specific Period of Indemnity, typically 12, 18 or 24 months, after which there is no loss payable.

So basically GE is "slimmer" but open-ended, while GP is somewhat "fatter", but time-restricted. The following chart would maybe help:

So which type of cover is better? It depends on the actual loss event, the industry you are in and the specific product manufactured. For a short interruption of the manufacturing operations that is likely to cause loss of customers (think about a very competitive marketplace, or commodity product), probably the GP will lead to the highest recovery, picking up the loss of client-base. However a very long period of interruption, or the loss of a niche product where your company is the sole supplier worldwide, would change the balance in favour of the GE cover, because your customers will just have to wait for you to resume sales.

You can see that selecting the right type of cover at inception of an insurance programme would be key in determining how much of your loss will be recovered in case of loss. This dilemma could generate massive headaches to any Risk Manager!

But here's the good news...

If you are a client of FM Global, you don't have to worry about this. It doesn't matter if you have GP or GE, because you actually have both! The FM Global Advantage (FMGA) policy allows you to measure both and choose the one that is more convenient for you (i.e the one leading to the highest amount). Our clients do not have to make that choice until after the loss has been measured each way and the coverage that provides the higher recovery has been determined.

Effectively, your FM Global Loss Adjuster will come to you with two cheques, one most probably bigger than the other, and ask you which one would you pick! Then all you have to do is to take a breath, concentrate for a second and make sure you pick the larger one....

Easy, isn't it? Yes, this is so good there have been several attempts to replicate this cover in the market, however ....

You may find that other companies offer this option, but to be exercised at the time of the loss or soon after, when it's not clear yet which one of the two coverages will provide the highest indemnification....it's not the same thing. It's more like a bet, like the old game of hiding something in one of your hands and showing both fists asking a friend to choose... 50:50 right?

No one can predict the future*, and with our sleep-easy business interruption insurance coverage, you don’t have to. With our Time Element Select ? option, you choose whichever coverage best meets your needs.

* Not strictly true, we have our Predictive Analytics but that's for another article (https://www.dhirubhai.net/pulse/fm-global-predictive-analytics-future-now-adriano-lanzilotto/).