THE EFFECT OF DEDUCTABLES AND POLICY WORDING
IS IT WHAT YOU THINK?
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Written by Daniel Thorpe
With a typical Energy claim standing at approximately USD 4.5 million, it’ s no surprise that Business Interruption( BI) is once again the # 1 business risk for the fourth year in a row.
To help insurers mitigate their exposure when an interruption occurs, power generation and petrochemical companies frequently retain a portion of the loss themselves in the event of a fire, explosion, machinery breakdown, power interruption or other disaster.
Because of this, the type of deductible is a critical factor when determining the recoverable versus the gross BI loss. Additional factors related to the deductible can also impact how the loss is calculated. Some of these include the policy wording and how it relates to the deductible, the circumstances surrounding the outage period and whether or not Increased Cost of Working( ICW) was incurred.
For example, a deductible involving a fixed monetary amount is easier to apply and gives certainty to both the insurer and insured. However, when daily values run
in excess of USD 500,000 per day, a 60-day waiting period( i. e. first number of days) deductible is easier to sell than the monetary deductible of USD 30 million or more, even though they may amount to the same thing.
Likewise, average daily value( ADV) deductibles can create their own quantification issues, especially in partial loss situations, when a plant is running at an increased cost for an extended period or in a deferred repair shutdown scenario, which can create a“ dilution” of the ADV calculation.
ADV deductibles can be more equitable than a waiting period in certain circumstances. One such example would be a power generation claim that occurs toward the end of the summer. Because capacity payments are more heavily weighted to the summer period, the insured’ s retention could otherwise have been much higher than the insurer’ s liability under the policy.
It’ s also not uncommon for policy wordings to be amended or updated with ambiguous terms and phrases as a means of anticipating potential loss scenarios.