Product Fundamentals: Industrial Special Risk (ISR) Insurance

What is ISR & who should consider it?

Industrial Special Risk (ISR) Insurance is an industry-standard policy wording to provide cover for physical loss or damage to property and financial losses incurred as a result of the damage – known as business interruption. An ISR policy form has been designed to be highly flexible in the cover it provides. It can be tailored to meet the needs of a diverse range of business types, including property owners, office occupiers, manufacturers, storage, and distribution. As it is recognised as the standard industry form, multiple insurers can share the risk if it exceeds a single insurer’s tolerance.

Due to the complexity of an ISR placement, it generally should only be considered for highly valued assets (generally over $5M) that are more complex to insure than property in a standard business policy. Therefore it is a product that should be considered by medium and larger businesses that have specific needs and larger assets where a business package would not suffice. (For further information relating to coverage for machinery and equipment see our article on ISR vs Machinery Breakdown cover here).

The key differentiator between ISR and business packages is that an ISR policy provides “all-risk” cover for property insured, with any exclusions to cover being noted specifically – whereas a business package will usually only stipulate what cover is included, and if it is not specifically mentioned, cover does not apply. ISR Insurers will typically tailor policy conditions to suit individual business circumstances, ensuring appropriate, cost-efficient coverage.

What does it cover?

There are two main sections of coverage within an ISR policy: Material Loss or Damage and Consequential Loss. The former covers physical property including buildings, contents, , and stock, whereas the latter covers loss of revenue, profit, rental income, and increased cost of working associated with maintaining business operations from an alternative location. If you are solely a property owner, this section would cover the loss of rent.

Common inclusions:
  • Physical Loss or damage to property (both weather and other extraneous perils).

  • Business interruption resulting from physical damage, failure of public utilities, or blocked access.

  • Malicious or accidental damage and theft.

  • Removal of debris, clean-up costs, and other additional costs incurred in repairing or reinstating damage following an insured event.

What doesn’t it cover?

Though ISR has very broad coverage of property and perils, it does typically come with exclusions. Some examples regarding property exclude cover for livestock, property in the open air, and dangerous goods. Insurers may also apply certain perils exclusions, such as excluding flood cover if the property resides in a high-risk flood zone.

However, ISR policies are more flexible than what you can find under the property section of a business pack, meaning it is possible to negotiate the deletion of certain exclusions.

The most recent common exclusion to be tested under ISR policies relate to COVID-19. (See our range of articles relating to COVID-19 and impacts on insurance here).

It is also important to note that all standard ISR policies include an exclusion for construction activities over a certain value (usually $500,000) whereby cover for both the property insured and construction activities are excluded. This means that when undertaking building works (including upgrades/ renovations) you need to consider how the existing assets will be insured during the construction phase.

Claims examples
Example 1:

An electrical fault causes a fire that damages the building and stock of a clothing shop. The business that owns and operates from this warehouse can no longer trade from the premises.

The policyholder will be entitled to recover the repair costs resulting from the fire damage to the premises, and the premises being reinstated. There will also be cover for the loss of stock to the fire. Based on accounting evidence provided to insurers, the policyholder will also be able to recover under the Business Interruption cover.  Insurers will review a similar business/trading period from the Insured’s records and using the Insured’s general profit margin, will pay lost profits during closure. If the policyholder is able to switch premises during repair (if they are extended) then cover is available to cover temporary premises under the Increased Costs of Working cover.

Example 2:

A thief breaks into a warehouse stealing a large amount of copper.

Building repairs required to make good any damage done during the break-in will be covered by the ISR policy. As will the theft of the copper (and any goods manufactured from it) that has been taken, even if the copper is more expensive than that purchased (relevant in the current climate of increased raw materials prices) as well as the cost of the labour spent to manufacture the copper into produced goods that were lost.  If the Insured is unable to trade whilst the copper is being replaced, then the Insured may make a Business Interruption claim for lost profits.

Example 3:

A lawyer’s office is flooded causing severe damage to the premises, and rendering equipment within the office a total loss.

The premises damage will be covered by the ISR policy as will the replacement of the office equipment. There is also coverage available for any personal property lost or damaged including the loss of money on the premises. There is also cover for loss/reconstitution of documents or deeds etc. that were on the premises at the time of the flood.  If the Insured is able to relocate temporarily to another premises during repair to their own premises, then the Increased Costs of Working cover would facilitate that.

What limit of indemnity is adequate?

An adequate limit of indemnity is dependent upon rebuilding costs. It is therefore essential that a building valuation report determines accurate rebuilding costs, and that this information is updated regularly. For example, the twelve months from September 2020 to September 2021 saw a 7.1 per cent increase in building costs across Australia, the highest national increase in 16 years. Similarly, business financials should be used to determine insurable income and should be updated regularly to reflect changes within the business.

Information required to obtain quotations
Generally, the following underwriting information is required at a minimum to obtain terms:
  • Asset schedule showing property replacement values (building, contents, stock).

  • Business interruption calculations.

  • Construction details of the building including materials and age.

  • Use of property and occupancy e.g., manufacturing, offices, storage.

  • Fire protection details e.g., sprinklers, fire alarms, and smoke detectors.

  • Theft protection details e.g., monitored burglar alarms and CCTV.

  • Details of location e.g., if in a high-risk bushfire zone.

  • Claims history.

If attainable, the following underwriting information will assist in obtaining terms or achieving the best level of cover and rates:
  • Building survey

  • Building valuation

  • Sprinkler block plans

  • Historic claims history (beyond 5 years)

  • Evacuation procedures

Bellrock manages ISR placements for clients with insured values up to $1B, including property owners, investment firms, high-hazard manufacturing, complex strata and retail operators’ schemes. For further information and advice relating to your property and business insurance needs, please contact us via the form below.

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