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Business interruption insurance-Insuring your future after a major disaster
What is business interruption insurance?
Business interruption is a type of insurance that is designed to protect businesses against the financial loss suffered as the result of an insured event. Business interruption covers the income a business would have received had the incident not happened. For businesses affected by fires, floods and other similar incidents, business interruption insurance can mean the difference between ensuring a long-term future for your business or potentially the business going under.
Does my organisation need business interruption insurance?
The main question to ask yourself is whether damage to the business’ property or physical assets would affect the companies profitability or ability to trade for any sustained period of time? If the answer is yes, then you definitely need business interruption insurance.
What types of claims does business interruption cover?
Business interruption protects your business from any property related incident that affects its ability to trade.
This type of cover always has a condition called a material damage proviso. The proviso requires that the policyholder maintains active material damage policies at all times to protect the business’ property and assets. The purpose of this proviso is to ensure that in the event of damage, funds are available to repair or replace damaged assets. This in turn then minimizes the period during which the affected business will be interrupted, thereby reducing the time the business interruption insurer is required to pay out.
What type of business interruption policy do I need?
This will be determined by what type of business you run, and the services that you offer to your clients. Below is an overview of the different types of business interruption cover available:
Types of Business Interruption Insurance:
- Loss of Gross Profit. This is the most commonly used method of insuring business interruption cover. It is aimed at businesses that manufacture, retail, import, export or wholesale products
- Loss of Gross Revenue/Fees. This type of cover is designed for individuals providing a service to their clients as opposed to a specific product. Examples of businesses that should consider this type of policy are accountants, solicitors, architects, and consultancy services.
- Additional Increased Cost of Working. This covers any additional expenditure incurred by the insured for the purpose of reducing the shortage in production following an insured loss. This is an option where the financial income stream of your business would not necessarily be impacted following a claim, however there would be additional costs to keep your business running such as temporary premises, additional administration costs to keep the business running.
- Advanced Profits Insurance. Covers the forecast profits of a new premises, it is designed to cover delays in constructions projects following an insured event.
- Loss of Rental Income. This is aimed at landlords of commercial and residential properties.
- Alternative Accommodation. This is for residential landlords whose tenancy agreements stipulate they will provide alternative accommodation in the event the property becomes inhabitable.
Often businesses need more than one type of cover to ensure their business is sufficiently protected.
What sums insured should I use for Loss of Gross Profits?
When calculating the sum insured on a loss of Gross Profit basis it is essential to consult with your accountant. This is due to the fact that the insurer’s definition of gross profit traditionally differs from that of your accountant.
You will also need to factor in any growth plans for the business for the period you will be insuring the loss of income (Indemnity Period).
What is the business interruption indemnity period?
The indemnity period is the period during which a business’ earnings are covered under the terms of the insurance policy.
The ‘maximum indemnity period’ is the period of time that the insurer will cover business interruption losses, starting from the date of the claim incident.
When choosing an indemnity period, it is important to factor in the following:
- The maximum amount of time it would realistically take for your business to be able to trade again independently,
- How long it would take to rebuild damaged buildings. This should include how long it would take to complete any required planning permission submissions and obtain any relevant permits.
- Machinery? How easy would it be to source and replace the equipment you have? Would there be a waiting time or production time to factor in.
- How long would it take you to win back your client base if they temporarily moved their business to a competitor?
- Therefore, it is arguably best to have an over generous indemnity period, rather than one that may fall short.
Review your existing covers now.
Stephensons Risk Management can review your existing business interruption covers. We can check if you are covered on the right basis, as well as assessing whether your sums insured and indemnity period are sufficient for your existing business model and future growth plans.