Valuing Business Income Exposures: A Case for Blanket Business Income Insurance

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...of the disruption concluded that the financial impact of the flood’s physical damage went far beyond the costs exclusively related to detours and re-routes around the damaged rail lines.

It was necessary to provide the insurers with a full explanation of what caused a line to become congested and, as such, what expenses were triggered relative to the delays.

Consider a single-track railroad between two points with a given number of sidings (bypass points for meeting and passing trains). In normal operations, scheduled trains could move over the rail line with minimum delay when meeting and passing each other. With increased train movements over this line, as was the case following the flood, delays began to mount, as sidings became blocked by trains awaiting a route, a crew, or a locomotive. It became impossible to maintain a train’s scheduled route because of the reduced number of available points to meet or to pass other trains.

The result was severe service deterioration for all trains moving on the route, including the local trains that were assigned to do work for the customers along the route.

When extending this single- route congestion over the entire interconnected rail system, the additional costs began to escalate. Delays experienced in the Midwest caused delays throughout the entire system. This phenomenon led to a substantially increased cost for fuel, personnel, locomotive hire and many other expenses throughout the entire system.

Fortunately, the blanket time element provisions of the railroad’s insurance policy included coverage for extra expenses. This coverage allowed the insured to recover “the excess of the total cost during the period of restoration of the damaged property chargeable to the operation of the assured’s business, over and above the total cost that would normally have been incurred to conduct the business during the same period, had no loss or damage occurred.”

With consideration for this extra expense definition — and the blanket coverage — we believed that to appropriately analyze the claim, a projection needed to be made for what the railroad would have achieved financially had the flood never occurred. By so doing we identified not only the lost net...

"If proper care is taken in the analysis of time element coverage, a majority of unrecoverable losses can be avoided."


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