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Joint IIL & LBIA Lecture

Harry Roberts BSc (Hons) FCA FCILA MAE

Director Technical, Risk & Compliance

19th February 2009

ADDITIONAL INCREASE IN COST OF WORKING – An Adjuster’s View

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Additional Increase in Cost of Working

• Why is AICOW an issue?• What is the cover / wording?• Businesses likely to require AICOW cover.• Types of expenditure likely to constitute

AICOW.• How do you measure whether ICW is

economic or not?• Current market practice or claims.

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Additional Increase in Cost of Working

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Additional Increase in Cost of Working

THE INSURANCE BY ITEM NO.2 IS LIMITED TO THE ADDITIONAL EXPENDITURE BEYOND THAT

RECOVERABLE UNDER ITEM NO.1 NECESSARILY AND REASONABLY INCURRED

DURING THE INDEMNITY PERIOD FOR THE PURPOSE OF MAINTAINING THE BUSINESS

DURING THE INDEMNITY PERIOD

(DEFN: Business – As per details provided to Insurers)

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Additional Increase in Cost of Working

THE ADDITIONAL EXPENDITURE BEYOND THAT RECOVERABLE UNDER CLAUSE (b) OF ITEM NO.1 ON GROSS PROFIT AS THE INSURED

SHALL NECESSARILY AND REASONABLY INCUR DURING THE INDEMNITY PERIOD IN

CONSEQUENCE OF THE INCIDENT FOR THE PURPOSE OF AVOIDING OR DIMINISHING THE

REDUCTION IN TURNOVER

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Additional Increase in Cost of Working

THE ADDITIONAL EXPENDITURE IN ADDITION TO THAT PROVIDED FOR UNDER ITEM No. 1 ON GROSS PROFIT NECESSARILY AND REASONABLY INCURRED DURING THE INDEMNITY PERIOD IN CONSEQUENCE OF THE

INCIDENT FOR THE SOLE PURPOSE OF AVOIDING OR DIMINISHING THE REDUCTION IN TURNOVER WHICH BUT

FOR THAT EXPENDITURE WOULD HAVE TAKEN PLACE DURING THE INDEMNITY PERIOD IN CONSEQUENCE OF

THE DAMAGE

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Additional Increase in Cost of Working

Policy wordings – key common phrases:

• ……beyond or in addition to item 1(b)…….• ……necessarily and reasonably incurred……• ……during the Indemnity Period……..• ……to avoid or diminish the reduction in

turnover.

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Additional Increase in Cost of Working

• Why incur uneconomic expenditure anyway?

• Competitive industries – milk, bakery, laundry.

• Subcontract in event of loss – printers, ice cream manufacturers, dry cleaners, milk processing, cheese and bacon factories.

• Disproportionate costs to maintain – boarding schools and colleges.

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Additional Increase in Cost of Working

• Why proceed if economics of ICW are marginal?

• Longer term effects (of not doing so)

Printers, publishers, producers of luxury goods or services

• Indirect nature of expenditure

Blundell Spence, security

• Risk associated with not doing so

Customer threat, Plan B strategies

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Additional Increase in Cost of Working

Examples of expenditure that has been paid as AICOW:

• Security• Abortive acceleration• Marketing / rebranding• Customer incentives• Improved facilities / systems• Building a road

DEFINITELY NOT – M.D. underinsurance

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Additional Increase in Cost of Working

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Additional Increase in Cost of Working

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Additional Increase in Cost of Working

You got to ask yourself a question “do I feel lucky?”. Well, do you PUNK?