The Material Damage Proviso is actually at the very heart of a Business Interruption insurance policy and it is vital that you understand the effect it can have when making a Business Interruption claim. As we have said above, it is important to fully understand the very reason as to what Business Interruption / Consequential Loss means. BI is there to protect your business against the potential adverse effects of the perils of flood / fire / major burglary. By way of an example, if a burst water main significantly affects your business premises causing it to be uninhabitable for a few months whilst refurbishment is taking place, then sales are very likely to be drastically reduced because your customers will not be able to gain access to your premises to purchase items. The Business Interruption policy is in place to ensure that the business owner can eventually continue trading at the same level as they did prior to the incident. The Material Damage Proviso simply but fundamentally states that this part of your policy will only ‘come into play’ on the proviso that your building is fully and correctly insured. The reason for this is that should your business premises not be insured then it is very likely that you will not have the financial ability to allow for the rebuilding / refurbishment of the damaged premises. If that were the case and that there was no ‘Material Damage Proviso’, then that would put your insurers at unacceptable and unnecessary risk of having to pay more compensation to get your building refurbished when this, of course, comes under the building part of your policy.
Here’s an example as to why you should be insured for Business Interruption as well as just building insurance: –
There is a serious fire at a building at one end of a small street where the intensity of the heat has damaged the wiring cables feeding the whole street and it has also damaged the underground water pipes and sewage drains. The street is closed down temporarily while repairs are being carried out. However, further down the street and affected by the damaged utility pipes is a hotel which obviously cannot operate and they will have to ask their guests to leave and find alternative accommodation. Further, so serious was the fire that the whole building needs to be raised to the ground and rebuilt over a period of 6 / 12 months and seriously disrupts access to the street.
In this example, the owner of the hotel is fully insured for buildings and contents, but decided not to insure for Business Interruption to save money. To cut a long story short, the hotel’s loss of profit during this period has nothing whatsoever to do with flood or fire at his hotel and thus there is no claim to be made for the consequences of a fire at the other end of the street and, in all likelihood, there is every possibility that the hotel may have to stop trading because it has no customers and more importantly has no insurance for this Business Interruption.
Please do not think for a second that this is a worst-case scenario to illustrate an example. Over 35 years as Loss Assessors we have seen this situation happen on many occasions. It’s heart-breaking to see, especially when the situation was so avoidable.