An Introduction into Business Income Insurance and the Records & Information Services Management Industry

Before I get into the subject matter indicated by the title, I’d like to give you a brief introduction into my background and my insurance profile.  

Personally, I’ve been involved in the insurance industry for over 30 years. I started within commercial underwriting / management with Hartford and Chubb respectively, and then joined the Oswald Companies in 1978. There I was working within a wide variety of industries implementing commercial insurance and risk management programs for customers of all shapes and sizes — everything from mom & pop main street businesses with traditional insurance needs, to Fortune 500 corporations where “alternative risk financing” methods such as “captives” were often utilized.  In 1998, I got the itch to be an entrepreneur and left Oswald to form my own firm that was largely based on a captive insurance company I had formed specifically for the Courier Industry — an industry I had come to discover was woefully underserved from the standpoint of professional insurance and risk management.

In 2005, Oswald acquired my firm, as they had developed a strategic plan based on “niche specialization” and my firm had become a nationally recognized leading broker for the Courier Industry. Actually we had evolved along with the Courier Industry to encompass a lot more than simple local delivery of small packages in private passenger vehicles. While today this is still an integral element of the industry, there’s a lot more to it, with all sizes and types of vehicles, warehousing, third party logistics, records and information services management, etc.  Presently I run the Oswald Affinity & Association Groups Program Division, which is heavily “logistics oriented”.

It was a couple of my long time Courier customers who had gotten into the Records & Information Services Management industry that perked my interest into the business. They recognized my ability and passion to put the right insurance programs together for underserved niche industries and brought their business to my attention.  So in 2006, I began in earnest to learn about your industry.

On the surface, from an insurance perspective, the R&ISM industry appears to be pretty “vanilla”, i.e. your basic risk exposures are Auto, Workers Comp, General Liability, Crime (largely Employee Dishonesty), and Property (Building – if you own it, your Contents including EDP, and Business Income /Extra Expense), Boiler & Machinery, Warehouseman’s Legal Liability (covering your contractual liability for customer’s property), and finally an Umbrella / Excess Liability.  From what I could tell, there was no particular insurance company and /or broker that were touting any specialized products or services.  As a result of several speaking engagements over the past 18 months; one of PEG’s ( 7/07 ), NRC ( 2/08) and PRISM (5/08) I’ve gathered a significant number of R&ISM operations insurance policies to review / audit.  I’ve seen a lot of the very recognizable insurance companies including Hartford, Fireman’s Fund, Chubb, Travelers, etc. Most of the policies are some form of a very comprehensive “Business Owners” type package policy. Frankly, they are very broad in terms of scope of coverage and they are inexpensive in terms of cost.  

I suppose the one aspect of coverage that is a little exotic is Warehouseman’s Legal Liability.  The real trick here is to make sure the amount of coverage (limit) purchased accurately reflects the exposure you’ve assumed via your Customer Storage & Service Agreement. That should be fairly simple.  As I stated earlier, all this seems to be pretty vanilla.  However, I have uncovered something that puts a little hair on the risks for the R&ISM industry; otherwise I wouldn’t be writing this article and attending the PRISM conference! 

Actually there are a couple of “hairy exposures”

a.) “long tail” Business Income and

b.) potential liability resulting from the unintentional / intentional revealing of confidential customer information.

I’m just going to focus on the former for this article because I believe the Business Income (BI) exposure is a more “game changing” risk.

First of all you need to understand that the basic concept of BI insurance is to protect against loss of “net income” (net profit or loss before income taxes) that would have been earned or incurred, plus continuing normal operating expenses, including payroll, during the period of restoration, not to exceed the applicable limit of insurance.  So basically, once your facility is rebuilt or repaired, your BI coverage ceases.  Many of the BI coverage forms have a built-in extension called “Extended Business Income” or “Extended Period of Indemnity”, of 30 days.  Some will go to 120 days.  Virtually every carrier will, for an additional premium, offer the extension for a year.  On a more selected carrier basis, I’ve seen up to 3 years, and I’ve even seen a couple of “unlimited” extensions.  These extensions, particularly the unlimited variety certainly help, however, you have to understand that your claim still cannot exceed the applicable limit of insurance. Some of the broad off-the-shelf Business Owners policies don’t actually have a BI dollar limit.  It may be stated something like “12 months actual loss sustained”.  So even if there is an “extended period of indemnity” of some significance, it doesn’t increase the recovery beyond the 12 month limit, it only extends the period of recovery.

Are you getting the feeling there’s little value to your current BI coverage?  The problem is that the R&ISM industry doesn’t match up with traditional BI coverage.  A great way to illustrate is to take a typical manufacturing operation.  There’s a fire that causes extensive damage to the plant. It takes 10 months to rebuild the building, install new equipment and restock raw materials.  The BI insurance is going to cover that 10 month “period of restoration” and if necessary a 60 day Extended Period of indemnity, for “net income plus continuing expenses”.  Assuming there was an adequate limit on the policy, the insured manufacturer should have been made whole for the loss, and now they are ready to pick up where they left off. 

Now let’s look at a similar situation with a bad fire at an R&ISM facility.  The building gets rebuilt in 10 months, all the racking, security, etc. is back in and they’re ready to go.  The BI loss was adjusted based on the “net income” for the 10 month “period of restoration” and again we’ll throw in the 60 day Extended Period of Indemnity. The insured gets paid for that period, but is he back and ready to pick up where he left off?  Of course not!  The fire destroyed three quarters of the records stored.  He can’t go back to these same customers and simply get replacement units because the customer’s entire storage needs went up in flames!  So now the R&ISM operator has to start over by finding new customers and wait for his old customers to ramp back up.   Are we talking years here?

The bottom line is that any traditional Business Income coverage, even with an unlimited extended period of indemnity, is not going to do the job, period.  Even though the coverage with the unlimited extension helps, can you imagine trying to calculate an adequate limit, or can you imagine having some CPA firm hired by your insurance carrier, camped out in your office for weeks at a time over several years??  

So, what’s the answer?  Glad I asked!  It’s our just-announced “Storage Legal Life” (SLL) policy.  This, along with our soon-to-be-announced Errors & Omissions policy will be marketed under the banner of R&ISM Advantage Insurance Program.

The SLL policy has two coverage parts:  Part A is essentially Warehouseman’s Legal Liability (WLL) and Part B is Gross Income & Extra Expense.  The WLL part works similar to most WLL policies but is probably a bit broader than most.  Part B, however, is the real key.  It replaces the traditional Business Income coverage with what amounts to “life / disability insurance on a box”.  Here’s an illustration:

  • Facility with 500,000 units /boxes in storage
  • Average unit annual revenue is $6
  • Insured chooses to cover a 3 year period of lost revenue
  • $6 x 3 years = $18 per unit limit
  • Fire damages /destroys 100,000 units
  • Insurance adjuster confirms the damaged 100,000 units
  • Insurance company cuts a check for $1,775,000 ( $18 x 100,000 – $25,000 deductible )

How’s that for simplicity!  Now remember that this limit was based on “gross” revenue, so essentially it is a kind of windfall. The insured can use the claim proceeds any way he desires, which may include taking care of that large customer who had 5000 boxes soaked and is demanding that they be restored via freeze drying, even though his  agreement limits the liability of the R&ISM operator to $1/ box.  The rest of the money goes in the bank (or maybe today, best kept under his mattress!), covering the lost revenue adequately during the considerable time it might takes to replace the units that were destroyed.

Initially, we will be able to insure up to a $10,000,000 limit (Part A&B combined), per facility.  We feel this will meet the needs of most of you.

I appreciate the opportunity to work with the R&ISM industry and look forward to talking to many of you during the conference.

Jeff Ice is Sr. Vice President of Oswald Logistics which operates the logistics division of its parent company; Oswald companies. The Oswald Companies is a 115 year old full service insurance and risk management firm headquartered in Cleveland Ohio.  They have branch offices in Columbus and Middelburg Heights, Ohio; Birmingham, Michigan; Minneapolis, Minnesota; and Tampa, Florida. They also have a 27 year old sister company, Oswald Trippe & Co., which is a full service insurance and risk management firm based in Ft. Myers, Florida, with 20 offices in Florida and North Carolina.  In all, they have over 450 employees and currently are ranked in Business Insurance as the 42nd largest US insurance broker. Both firms are 100% employee owned and operated.

Oswald Companies is also a proud, long-time member of Assurex Global, a worldwide organization of 112 independent partners who are some of the world’s largest privately held risk management, commercial insurance, and employee benefits firms. With annual premiums exceeding $28 billion, Assurex Global would rank as the third broker in the world.

For more information on Oswald Logistics or to learn more about the R&ISM Advantage Insurance Program please contact Jeff Ice at (440) 625-1450 or jice@oswaldcompanies.com

Written by: Jeff Ice 2/10/09

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