Almost invariably, events that cause a Reduction in Turnover to occur will give rise to some savings in a business’ overheads.
Common savings include:
- Reduced Eftpos fees for retail businesses.
- A reduction in payments to casual staff.
- Reduced utility charges.
- Rental abatements.
- Repairs and Maintenance Costs
Despite assertions to the contrary the cost of overheads, such as electricity, rent, repairs and maintenance etc. do change over time!
Any claim based on an historic assessment of cost without consideration as to the level of change in those costs over time is flawed.
It is not simply a case of applying CPI to the level of historic costs on the presumption that such an adjustment reflects the level of charges that would have occurred during the Indemnity Period but for the loss.
There are many reasons why costs vary, other than general price rises, these may occur:
- Due to changes in the volume of output
- As a direct result of a change in Turnover.
- As prescribed under a contact (e.g. rent).
- Due to the implementation of planned operational changes, that may for example affect labour costs
- As a result of unplanned events, such as requirements for additional maintenance.
In determining the level of savings, due consideration as to the variability of overheads must reflect the above.
Caution should also be taken when selecting the base period for the identification of savings. Often one might see a valuation of savings based on the costs incurred immediately prior to the loss. This might be a sensible approach if the base period is representative of the loss period, but what happens if it is not. Costs too can be “seasonal” in nature.
