The Growing Risk of Uninsured Losses
Many of us in Credit have a tendency to gloss over our customers' insurance programs. We rely on customers to evaluate the magnitude of the hazards to which their businesses are exposed and to properly insure against them. It is, in the final analysis, up to customers to relate their exposure to their ability to absorb loss, through contigency reserves, without impairment of finances. And fortunately, in most instances prudent businesspeople utilize the advice of competent agents or brokers to do this. However, it is a fact of life that there have been occasions when a large loss was not adequately covered by insurance, resulting in a serious financial setback to the unfortunate victim. When this occurs, it can generally be traced to an unusual exposure considered to be of little consequence at the time the insurance program was formulated. Data Processing
One trend that is intensifying the consequences of this problem is increasing reliance on data processing equipment. This equipment is generally confined to a very limited area and is highly susceptible to damage. A small fire that would be inconsequential in any other section of a plant or office can be catastrophic when it involves sensitive electronic data processing equipment or media. Fortunately, notes commercial credit consultant Frank DuBrava, excellent insurance protection is available from a number of companies. "As with many other policies, optional coverages are available under the data processing policy," DuBrava reports. "Valuable papers and records, including books, deeds, abstracts, films, drawings, mortgages, and manuscripts, may be insured if desired. The loss and expense incurred in the collection of receivables resulting from loss or damage to the records may also be insured. "Many manufacturers now use computers in the actual production process and would experience a partial or total interruption of business were the computer to be damaged. This 'business interruption' exposure can be covered specifically under most data processing policies." Business Interruption Insurance
A business of any significant size seldom fails to carry some form of business interruption insurance, DuBrava continues. "In theory, this form of insurance is intended to do for the firm what the firm would do for itself had the normal conduct of business not been interrupted. There are numerous forms available, each designed to fulfill a specific need. One particular form that is not widely known but is worthy of mention is 'valued' business interruption insurance. "Unlike other forms, the adjustment in the event of loss is relatively simple under a 'valued' policy. Should damage result in a total suspension of business, a predetermined amount is payable for each and every day of shutdown." Payments for a partial interruption area are equally simple. A percentage reflecting the degree of interruption is applied to the valued amount per day; this is based on the number of units produced or total sales, or any other predetermined method. The dollar amount is payable for each day of partial suspension. Settlement Criteria
It is important to note that the method of settlement for partial interruption can be based on many different criteria. It can, for example, be the number of units produced or, if the units vary in value, the actual value of production. In fact, it can be based on nearly anything that is a proper reflection of the likely effects of a partial interruption. The amount recoverable per day of total suspension is mutually agreed upon by the policyholder and the insurance carrier. This amount is payable regardless of the earning capacity of the business at the time of loss. Seasonal fluctuations in earnings or production can be provided for by varying the amount payable. "Policy language is particularly important in this form of protection, notes DuBrava. "Possible tax advantages might be involved when the contract makes no reference to profits but designates payment for loss of use and occupancy. Be sure to consult your tax adviser." Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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