DECLARATION LINKED POLICIES

The UK market has increasingly been moving towards “Declaration Linked” business interruption policies in order to address the problems associated with forecasting future profits.  It is only by the accurate forecasting of future profits that an adequate sum insured can be set for business interruption cover.  Furthermore, it is necessary to look forward 24 months when one has a 12 month maximum indemnity period on the basis that a loss may occur at the end of the policy year and then invoke a maximum indemnity period that will not end until 24 months after the inception of the policy.  It is difficult for many businesses to accurately forecast future profits and, of course, longer maximum indemnity periods require an even longer range forecast.  In order to address these issues, declaration linked business interruption cover was introduced.

THE KEY FEATURES OF DECLARATION LINKED COVER IS:

1. At the start of each policy year and prior to each renewal, the policyholder submits a declaration showing the estimated gross profit that is anticipated will be generated during the financial year most close to the period of insurance.
2. The premium at the start of the policy year will be charged on the basis of the estimated gross profit and will be subject to adjustment by way of a returned premium if the estimate is too high and by way of an additional premium payable if the estimate is too low. It is normal that the declaration is confirmed by the policyholder’s auditors within six months after the end of the policy year.
3. Insurers’ liability is (normally) the estimated gross profit plus one-third uplift that is available in the event that the estimate was too low.
4. Most importantly, there is no underinsurance average clause on declaration linked policies.

The one-third uplift is made available to meet unforeseen and unforecasted increases in the gross profit.  It is not to be used in order to allow a declaration that is set deliberately too low to be put in place in order to achieve a lower premium.

The one-third uplift that is available to be applied to the overall business interruption settlement and the absence of any underinsurance averaging clause make declaration linked policies the most appropriate business interruption insurance basis in virtually every circumstance.  In fact, it is difficult to imagine a set of circumstances where the traditional Sum Insured basis with an underinsurance averaging clause would be better or more appropriate.  Furthermore, declaration linked cover is generally rated identically to sum insured cover so on the same sum insured the premiums should be identical.