How extended premises extensions operate when off-site risks prevail

Business Interruption (BI) insurance is an essential form of cover intended to protect a business in the event of an interruption of the business, following damage to property by an insured event.  The standard cover normally responds to business interruption losses consequent upon damage to property that is insured in terms of the assets policy.

However, a business interruption loss can also arise from damage or destruction to property at locations that don’t belong to the insured and may even be located far away from the insured’s premises.  “An example of this, is where a fire occurs at the premises of a major customer or supplier that could have a devastating impact on your business.  Damage occurring at premises in the vicinity of your business also has the potential to prevent or hinder access to your premises that could impact your business operations negatively,” explains Garth Rowe, Principal Claims Officer at Aon South Africa.

It is for this reason that business interruption insurance can extend to include cover for business interruption losses following loss or damage which has occurred at other specified locations. 

“This extended cover is applicable when the damage that occurred at an external location is of such a nature that it would have been covered under your business’ assets policy as if such damage had occurred at your own premises,” Rowe explains. 

It is important for risk managers to consider the risks that could affect their business operations due to damage occurring elsewhere at properties that don’t belong to the business and are beyond the control of the business.  “Not only is it necessary to consider what risks need to be insured in the event of damage occurring elsewhere, but also to consider what the appropriate limits of indemnity should be depending on the availability and extent of cover required,” says Rowe.

“Extended premises cover extensions are normally sub-limited, which means the insurer has limited its exposure to a specified amount.  The sub-limit is usually set at an amount that is lower than the limit provided by the policy in terms of the main business interruption cover,” he explains. 

An example of a claim is a business interruption loss suffered by an insured whose premises needed to be evacuated following a fire that occurred at the adjacent premises, belonging to a hazardous waste disposal company.  The toxic smoke and emissions from the neighbouring premises made employees ill, resulting in a complete evacuation of the insured’s manufacturing plant until it was safe to resume operations.

“The example referred to above highlights the challenges that could arise from an insurance claim point of view.  In the absence of any evidence to prove that there was physical damage to the insured’s own property, the insured would need to rely upon the prevention of access extension which usually provides cover for business interruption in consequence of damage to property located within, for instance, a 10km radius of the insured’s premises.  In this instance, the fire that occurred at the adjacent premises would trigger the extended premises extension under the business interruption cover,” Rowe explains. 

The lesson to be learnt is that where an insured is exposed to risks of this nature, the appropriate extensions should be in place and the sub limits for these extensions need to be sufficient to address the off-site business interruption risks.

“Business Interruption cover and all its intricate options is a discussion that should be undertaken with a broker who is able to provide qualified advice.  The value of having an expert Aon broker by your side cannot be emphasised enough when it comes to making informed decisions on your business risks and your insurance requirements,” Rowe concludes.