MHEC MASTER PROPERTY PROGRAM BUSINESS INTERRUPTION VALUE REPORTING. March 8, 2018

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1 MHEC MASTER PROPERTY PROGRAM March 8, 2018 David Letzelter Senior Vice President Thom Smith Assistant Vice President

2 BI Introduction to business interruption coverage Calculating the business interruption value Review of business interruption worksheets Other considerations Deductions 1

3 BI Introduction to Business Interruption Coverage 2

4 BI Can anyone guess what this chart shows? Index = 100 Index = 100 Index = 100 Index = 100 3

5 BI Terminology Time element vs business interruption Business interruption vs business income BI CBI Actual loss sustained Experience of the business Necessary 4

6 BI What is Business Interruption Coverage? Coverage to protect the institution against the financial consequences of a loss from a necessary disruption in operations Financial impacts can be in the form of: Continuing expenses; Increased costs; Additional expenses to mitigate loss; or Loss of net surplus (revenue minus expenses) In many large claims the BI loss exceeds the property damage amount 5

7 BI Why Report BI Values Each Year? Need to understand of the financial impact to the university from a disruption: Setting appropriate limits Understanding maximum foreseeable loss (MFL) amounts Allocating premium Understanding impact of percentage deductibles Request annually due to changes that occur A properly completed BI worksheet will help with the claim adjustment process 6

8 BI Time element coverage arising from damage to your property: Business interruption Extra expenses Expediting expenses Rental income On premises services Ordinary payroll R&D Extended period of indemnity 7

9 BI Time element coverage arising from damage to property of others: Contingent time element: Contingent BI Contingent extra expenses Royalties Leader (dependent) property Civil or military authority Ingress/egress Service interruption Leasehold interest 8

10 BI The Golden Rule Chain of Coverage Direct Physical Loss or Damage To Insured Property From a Covered Cause of Loss Resulting in an Interruption in Operations If any link in the chain is broken, coverage does not apply Insured property includes contingent or dependent locations Covered cause of loss is All Risks except as otherwise excluded 9

11 BI The Policy Covers The actual loss sustained For the period of indemnity Moment Loss Occurs Rebuilding Period Building Completion Students Return Period of Indemnity EPI 10

12 BI Calculating the Business Interruption Value 11

13 BI What is Contemplated in the Calculation? Gross earnings ( top-down ) approach: Operating revenue less non-continuing expenses Generally-speaking, revenue less variable expenses Gross profits ( bottom-up ) approach: Net surplus plus normal continuing expenses One-year period Forward-looking Without regard for loss mitigation 12

14 BI Operating Revenue Types Tuition (less discounts) Fees (less discounts) Research grants Contracted research Athletic ticket sales Food & beverage sales TV & radio broadcast rights Merchandise sales Health insurance proceeds Parking receipts Room & board Other ticket sales (eg, museums, theaters) Regularly-scheduled fund raising drives 13

15 BI Continuing Expenses BI covers necessary continuing expenses as part of the Actual loss sustained Following are some continuing expenses: Faculty and administrative staff Equipment leases Mortgage and business loan payments Real estate taxes Insurance Advertising expenses Heat/light/power under contract Other contractual obligations 14

16 BI Non-Operating Revenue Federal, state and local appropriations: Caveat: Unless they would be jeopardized by a shutdown Non-operating grants Capital grants and gifts Endowment income Interest or dividend income Outside royalty payments or other external income streams* 15

17 BI Non-continuing and Variable Expenses Cost of Merchandise Sold (books, clothing and other retail) Cost of Materials and Supplies Used (office supplies, classroom supplies, lab materials, food) Discounts (other than scholarship aid) Expenses (contractual adjustments, bad debts, collections) Utilities (excess of any minimum demand charges) Discontinued auxiliary services (residence halls, food services, health services, student unions, athletics, etc) Other discontinued expenses (postage, travel, etc) Services purchased from outsiders not under contract 16

18 BI Traditional BI Worksheet - Revenues 17

19 BI Traditional BI Worksheet - Deductions 18

20 BI IPEDS Worksheet 19

21 BI IPEDS Worksheet 20

22 BI Other Considerations 21

23 BI Ordinary Payroll This is a subjective calculation All payroll except officers, executives, managers, employees under contract and employees as determined by the Insured Considerations: Good corporate citizen Substitute job opportunities Difficulty to re-train new hires Union contract requirements Deductions would include insurance premiums, employment taxes, Social Security and unemployment insurance 22

24 BI Ordinary Payroll Careful consideration think in terms of a year-long shutdown Laying off employees may delay resumption of normal operations Cost of employee labor used for repairs, debris cleanup and other post-loss costs can be included in the insurance claim May be at reduced rates 23

25 BI Other items Depreciation expense: Do not deduct This is an accounting expense, but a continuing one Think in terms of a building depreciating over time Research & Development: Generates more expense than revenue during the research phase Special care should be taken to review contingent exposures: Non-owned sports facility Income from joint ventures Dependence on foreign students from a particular country 24

26 BI Tripping Hazards Business interruption does not cover revenues per se Coverage is net surplus (revenues minus expenses) Exposure versus risk Payroll/ordinary payroll 25

27 BI 26

Important Disclosure This document and any recommendations, analysis, or advice provided by Marsh (collectively, the Marsh Analysis ) are intended solely for the entity identified as the recipient

28 Important Disclosure This document and any recommendations, analysis, or advice provided by Marsh (collectively, the Marsh Analysis ) are intended solely for the entity identified as the recipient herein ( you ) This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh s prior written consent Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage

Business Interruption Insurance Coverage An Overview PAUL D. POUSSON, ARM, DRM MAY 11, 2017 AREA SENIOR VICE PRESIDENT

Business Interruption Insurance Coverage An Overview PAUL D. POUSSON, ARM, DRM MAY 11, 2017 AREA SENIOR VICE PRESIDENT Today s Agenda Business Interruption - What is it? Some Business Interruption Coverages