Indemnity period
The maximum period over which a business interruption loss is paid after the event, the one parameter that decides whether the cover is useful at all.
On March 19, 2021, the Renesas semiconductor plant in Naka, Japan, caught fire. It took on the order of four months to get back to nominal output, and the disruption for carmakers downstream lasted much longer. Renesas's indemnity period measures the first of those spans; the carmakers' disruption falls under their own contingent business interruption cover. The indemnity period is the span, running from the physical loss, over which business interruption cover meets the drop in margin. It runs until the return to normal, which often comes well after the works are done; a plant rebuilt in eight months can take two years to win back its market share. It is, by insurers' and brokers' own account, one of the worst calibrated parameters in commercial policies: twelve or eighteen month periods are common, and the time needed to get back to pre-loss turnover is regularly underestimated. It gets set at inception, often on gut feel, and cannot be fixed at the time of loss: too short, the period cuts off payment just when the business most needed carrying, with nothing in the wording flagging it. The right length turns on rebuilding lead time, availability of specific equipment, requalification of a production site and the seasonality of the trade. Without that bound, the insurer would be guaranteeing the company's own results.
After the fire of March 19, 2021 at the Renesas semiconductor plant in Naka, Japan, it took about four months to return to nominal output. For Renesas, a three-month indemnity period would have cut off payment before the recovery was over. The carmakers' downstream loss, which lasted much longer, belongs to another contract: their own contingent business interruption cover.
- Zurich UK, "The importance of setting an appropriate indemnity period"; Gallagher and Lloyds Bank, "Commercial underinsurance" bulletin
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