In this issue we look at what is commonly known as the "adjustments" or
the "trends" clause in a typical Business Interruption policy wording.
An example is shown below:
Rate of Gross Profit: The rate of Gross Profit earned on Turnover during the financial year immediately before the date of the damage
Annual Turnover: The Turnover during the 12 months immediately before the date of the damage.
Standard Turnover: The Turnover during that period in the 12 months immediately before the date of the damage that corresponds with the Indemnity Period
To which such adjustments shall be made as may be necessary to provide
for the trend of the Business and for
variations in or other circumstances affecting the Business either before or after the damage or which would have affected the Business had the damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the damage would have been obtained during the relative period after the damage.
One view is that the clause allows the claims preparer to change literally anything in order to estimate what "would have been" the loss of Turnover or Gross Profit in the preparation of the claim. An alternative view is that because the policy tells us how to prepare the claim, based on a formula, adjustments can only be made to those items or definitions within the adjustments clause which, in the case of the example above, are Rate of Gross Profit, Annual Turnover and Standard Turnover.
Which view is correct?
Well, the answer is a combination of both. A recent claim we prepared concerned a retail store, it was noted that the business had trended
downwards by a factor of 15% in the year prior to the damage. The loss adjuster contended that this was a continuing trend due to the general downturn in retail trading.
In fact, the primary driver behind the downturn was that the shopping
mall in which the store was located was being refurbished in the period
prior to the loss, with restrictions in car parking spaces and general
inconvenience in the mall itself. The refurbishments were completed half way through the indemnity period, and numbers of patrons visiting the
mall returned to its pre-refurbishment levels. This return of customers
was evidenced by the mall's foot traffic counts.
The store was part of a retail chain, and we compared turnovers of other equivalently sized stores with the damaged store. There was a strong pre and post loss correlation between the monthly turnovers of each of the stores, so much so that another store could act as a proxy for the turnover of the damaged store during the indemnity period by using the historical
relationships of monthly trading results.
Therefore the expected trading of the store but for the loss was not
prepared simply based on Annual Turnover and 'trend', it was based on
the actual contemporaneous sales data from the proxy store.
While the true retail trend of the business was still negative, reflecting
the general retailing environment, it was not as great as the historical
trend of minus 15%. Using the actual contemporaneous sales data from
the proxy store showed the underlying trend was really only minus 5%.
The 10% differential was from the reduced number of patrons due to the mall's refurbishment, which was a "one-off" effect felt prior to damage.
This was not a recurring event (or trend) and its impact was already factored into the Standard Turnover. This 10% 'adjustment' increased
the claim by hundreds of thousands of dollars.
The claim fits neatly under the formula of the policy with appropriate
adjustment. The trend applied has been derived so that its application under the formula will calculate a result which would represent, as
nearly as may be reasonably practicable, the results which but for
the damage would have been obtained during the relative period after
This example based on a real-life scenario illustrates the importance of
the "adjustments" or "trends" clause in estimating a Business Interruption Insurance loss.