Head Office and Outsourcing Coverage in Business Interruption

Many companies outsource a large number of activities. These could include HR, accounting, payroll, legal services, Insurance, etc. Some of these outsourced activities can be revenue-generating. Some of them can lead to a reduction in turnover if the outsourced activity ceases due to an insured event. Similarly, any insured event in the head office or a back-office function could lead to a reduction in turnover. It is possible that any insured events leading to a material damage loss in the head office or back office or outsourced activities will result in a reduction in turnover but the impact is not felt during the indemnity period. The impact could be felt much beyond the indemnity period. Normally, the BI policy would not cover such a loss of GP or ICOW if it does not occur during the indemnity period.

To quote Riley: “Another aspect of this matter to be considered is the possibility of fire or other damage occurring at a group’s administrative head office separate from manufacturing premises. If there is any possibility of damage at the central administrative offices having an adverse effect on turnover, or causing an increase in the cost of working, at any group member’s premises it is essential to include the head office premises in the overall business interruption insurance of the group and obtain cover for the interdependency. … Even where damage at the head office would appear to have no discernible effect on the business of the group, insurers agree that reasonably increased costs are payable as a claim under the group policy (including the head office premises), because it is accepted that the central administrative function is a necessary part of the overall group activities”.

In the UK, this issue is dealt with by a letter known as the “Blundell Spence Agreement”. The Blundell Spence agreement was a market agreement that agreed that insurers would if requested, issue a letter of intent to recognize that an office burning down but the factory being undamaged, would still have a negative effect on a business, even if any loss of turnover were not easily apparent. The Blundell Spence letter of intent issued by insurers agrees that damage to the offices attached to a factory (or the head office) would be covered and a reasonable Increase in Cost of Working would be paid in the same way as if the factory itself had been damaged, irrespective of what the policy actually says.