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Understanding Increased Cost of Working in Business Interruption Cover

The Increased Cost of Working (ICOW) is a term used in UK business insurance and claims. It refers to the extra money a business has to spend to keep running as normal after something unexpected happens, like a fire or flood. This could include things like renting another place to work from while their usual building is being repaired. The aim is to avoid losing income by keeping the business going. The amount claimed for these extra costs can’t be more than the amount saved by not having a loss of profit.

This cover is generally included within both the insured gross profit and gross revenue bases, where it is subject to an ‘economic limit’. This means that a business cannot claim more under an Increased Cost of Working item than what they saved by avoiding a claim for loss of profit.

To put it simply…

Imagine you own a bakery and a fire damages your oven. You cannot bake any goods until the oven is replaced or repaired, which means you can’t make any money. To avoid losing your income, you decide to rent a commercial kitchen space with an oven. The cost of renting this kitchen is an extra expense you wouldn’t normally have, but it allows you to continue baking and selling your goods.

This extra expense is what is known as the “Increased Cost of Working”. It’s the additional money you had to spend to keep your business running after an unexpected event.

Now, in terms of insurance, you can claim these additional costs from your insurer if you have a business interruption insurance policy that includes ICOW. However, there’s a limit: the amount you claim cannot be more than the amount you would have lost if your business had stopped operating. In simpler terms, if your increased costs are more than your normal profits, the insurance won’t cover the full amount.

The idea behind this is to prevent businesses from profiting from insurance claims and to encourage them to manage their expenses effectively. It’s also to ensure that the insurance pay-outs are used for their intended purpose: to help businesses recover and continue operations, not to provide them with extra profit.

The Connection Between Increased Cost of Working and Insurance

Claiming Increased Cost of Working on Your Insurance

Increased Cost of Working (ICOW) is a critical feature in business interruption insurance policies. It provides coverage for additional expenses incurred following a claim. For instance, if a fire damages your business premises and you have to rent another space temporarily, the extra costs associated with this temporary relocation might be covered under ICOW. It’s important to note that these costs are only covered if they’re necessary to keep your business running and they don’t exceed the amount of profit you would have lost if you hadn’t incurred them.

Limitations on ICOW Claims

However, there are certain limitations to ICOW claims. The ICOW payment is constrained by the rate of Gross Profit, meaning the more uninsured variable costs that are deducted, the less Gross Profit there is to cover the increased cost of working. Moreover, ICOW is often confused with Additional Increased Cost of Working (AICOW). While ICOW covers those increased costs of working that can be linked to maintaining your turnover, AICOW covers additional costs that can’t be directly linked to maintaining turnover.

The Role of the Indemnity Period

What is the Indemnity Period?

The indemnity period refers to the duration during which your business’s profits are covered after a damaging event occurs. It begins from the date of the event and lasts until your business is back to operating as it would have if the event had not occurred.

The Indemnity Period and ICOW: How They Interact

The indemnity period plays a significant role in ICOW claims. It sets the time frame for which these increased costs can be claimed. For instance, if you had to rent a temporary space for your damaged bakery, the indemnity period would start from the date of the fire and last for the indemnity period specified in your policy. Any ICOW claims would need to fall within this period.

Consequences of Underestimating the Indemnity Period

Potential Risks to Your Business

If the indemnity period is underestimated, your business might not have fully recovered before the coverage ends. This could leave you with out-of-pocket expenses that can’t be claimed under ICOW. This is especially risky for businesses that depend heavily on specific locations or equipment, as the recovery time could be longer than expected.

Making Sure Your Business Fully Recovers

To avoid such risks, it’s important to take into account all potential factors that could delay your business’s recovery when choosing an indemnity period. This includes things like the time it might take to rebuild premises, replace equipment, or regain lost customers. By doing so, you can ensure that your business interruption insurance provides adequate protection for your business.

When Does Increased Cost of Working Occur During Claims?

ICOW comes into play when a covered event triggers a business interruption, and the business must incur additional costs to mitigate the impact and resume operations swiftly. Here’s a breakdown of scenarios where ICOW may be applicable:

Temporary Relocation Costs

If a business’s premises are rendered unusable due to damage from a covered event like fire or flooding, ICOW can cover the expenses associated with relocating operations to a temporary facility.

Expedited Repair and Replacement Costs

To expedite the repair or replacement of damaged property or equipment, businesses may incur higher costs for rush orders, overtime, labour, or premium delivery services. ICOW can cover these additional expenses.

Alternative Supply Chain Expenses

Disruptions in the supply chain due to events such as transportation strikes or natural disasters can lead to increased costs for sourcing alternative suppliers or expedited shipping. ICOW can help mitigate these expenses.

Increased Labour Costs

Businesses may need to hire additional staff or pay existing employees overtime to meet production deadlines or address backlogs caused by the interruption. ICOW provides coverage for these additional labour costs.

Extraordinary Marketing and Advertising Expenses

Maintaining communication with customers and stakeholders during a business interruption is crucial for preserving goodwill and retaining market share. ICOW can cover the costs of additional marketing and advertising efforts to reassure customers and attract business.

How to Calculate the Increased Cost of Working

Calculating the Increased Cost of Working (ICOW) involves a series of steps. Here’s a basic guide:

  1. Identify Additional Costs: The first step is to identify all the additional costs your business has incurred as a result of the interruption. These could include rent for a temporary location, increased transportation costs, overtime wages for employees, extra advertising costs to retain customers, and more.
  2. Subtract Saved Expenses: Next, you should subtract any expenses that you’ve saved as a result of the interruption. For example, if your premises were damaged and you’re not currently using them, you might be saving on utilities or other operational costs.
  3. Consider the Limit of Indemnity: The ICOW is subject to the limit of indemnity, which is the maximum amount the insurer will pay for a claim. Therefore, it’s important to consider this limit when calculating the ICOW.
  4. Adjust for Gross Profit: The ICOW payment is often constrained by the rate of Gross Profit. This means the more uninsured variable costs that are deducted, the less Gross Profit there is to cover the increased cost of working.
  5. Check Policy Terms: Finally, you should check your policy terms to see if there are any specific conditions or exclusions that apply to ICOW. For instance, some policies might only cover certain types of costs, or they might have a waiting period before coverage begins.

It’s important to note that calculating ICOW can be complex and usually requires the assistance of an insurance professional or a claims adjuster. The specifics can also vary depending on the terms of your insurance policy

In conclusion, Increased Cost of Working (ICOW) plays a crucial role in mitigating the financial impact of business interruptions under Business Interruption insurance coverage. By understanding how ICOW operates and its applications across different industries, businesses can better prepare for unexpected disruptions and safeguard their operations against financial losses.

If you would like to speak to an expert about this or any other aspect of your claim, call our free Property Claim Helpline on 0800 002 5819, for a no obligation consultation.


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