Accountant: Manufacturers lack adequate insurance cover
Jeffrey Nedas, who has extensive experience of handling claims for firms disrupted by everything from fires and explosions to forced relocation owing to the Olympic Games, said many manufacturers simply renewed premiums each year without a proper assessment of what risks they faced and whether their cover was appropriate. “So often you can see that insurance has been organised at the eleventh hour, and the board has not really sat down and asked what would happen if we had a total loss?”
Typically, finance directors were responsible for organising insurance and did not waste time thinking about it unless premiums jumped up at renewal time, he said.
While many food manufacturers had business interruption insurance, which provides protection for the loss of profits and other expenses resulting from a break in commercial activities, they were frequently overly optimistic when it came to negotiating indemnity periods, he added.
The ‘indemnity period’ within such policies is an estimate of the time needed to restore the business to where it was financially before disaster struck. However, many food manufacturers’ policies contained indemnity periods that were “far too short”, argued Nedas. “I’m talking a year. But if your business is hit with a catastrophe, a year is not long enough to recover.”
Written records
In many cases, food manufacturers also kept no internal written records of critical meetings with major customers that could potentially be used in the course of an insurance claim to prove that they were on the verge of securing significant contracts, said Nedas.
“The biggest problem in many of the cases I have been involved with has been lack of evidence. If you are on the verge of signing a game-changing contract, do you have any evidence of what was said by whom, when? While a few notebooks can’t necessarily be used as the basis of financial projections, they can be used as evidence.”
He added: “I’ve got three key messages for food manufacturers: First, make sure that the indemnity period in your policy is long enough. If it’s one year, it should probably be three. Second, always keep good records of your discussions with customers, even if nothing formal is signed or agreed. Third, pay proper attention at renewal time. Call your accountant and find out exactly how much your stock is worth for a start.”
Kevin Smith, practice leader for the food sector at insurance broker Jardine Lloyd Thompson, said: “Smaller companies or growing companies that perhaps started in someone’s kitchen often do not have adequate cover. They have property cover, but not business interruption cover and loss of profits, which means they are only covered for material assets such as stock and equipment.”
He added: “The other thing we do find is inadequate indemnity periods. People think they can get back up and running in 12 months, and that’s pretty optimistic in many cases.”
One insurance industry source added: “In my experience as an underwriter and when dealing with claims, the predominant inadequacy of business interruption cover generally relates to an inadequate indemnity period. The insured must estimate the time required to reinstate or rebuild the premises, replace the plant/machinery and stocks and regain lost custom.”
