What is business interruption insurance?
Business interruption insurance can provide cover for loss of profit/revenue or the additional expenses you may incur to get yourself back up and running if you are unable to trade following an insured event.
Business interruption insurance will not only cover you for your loss of income whilst the business recovers but, providing that your sum insured is adequate, it will take into account any planned growth you may have intended to make had the disaster not occurred.
Insurance experts estimate that business interruption insurance is one of the most valuable covers available, yet it is often overlooked by business owners. Since property insurance only covers the cost of repairing or replacing the physical loss or damage to the buildings and/or contents of the business in the event of a disaster, business interruption cover is invaluable in covering the loss of income whilst the permanent business location is being reinstated.
What is my sum insured?
The sum insured relating to business interruption insurance is usually referred to as the gross profit amount. This is not to be confused with the accounting term for gross profit and it is often used to calculate the business interruption insurance premium and set the monetary limit for the cover.
When setting your insurance gross profit amount you start with your turnover then take away the expenses that are not insurable. These are the expenses that will vary in proportion to your turnover if the business suffers an interruption following an insured event, such as purchases, bad debts and transport costs.
Remember when setting this amount you need to make sure it is what you expect to make in the future taking into account any plans for growth, not necessarily what it was previously, as your loss could occur on the last day of your policy period and continue to pay for up to the same length of time as the maximum indemnity period.
What is the maximum indemnity period?
When you buy your policy, you will also need to decide the maximum length of time (the indemnity period). This is the time it will take you to get your business back up and running to the same trading position you were at prior to any loss, should you suffer an interruption due to an insured event. You will need to consider the worst possible damage or disaster that the business could incur and estimate how long it will take to repair or replace buildings, machinery and stock and determine the length of time it will take to recover your customers and market share. Typical indemnity periods range from between 12 to 36 months.
For example, if you suffer a fire loss that damages the majority of your premises, ask yourself how long it would take for you to return to your normal trading levels once the building is fully repaired and safe to reopen? This will include the time it will take not only for the actual repairs but planning permission requests/proposals, professional services and surveys, sourcing of equipment and materials and the like.
To ensure that you do not underestimate the indemnity period it’s important that you identify the time vulnerable areas within the business, consider the likelihood of them being faced with an interruption due to an insured event and the amount of time it would take to return back to normal.
What does Business Interruption insurance usually cover?
- Lost income if there is an interruption to your business as a result of an insured event covered by the policy which causes damage to your property. This ensures that the fixed business expenses will continue to be paid, such as your mortgage/rent and salaries.
- It also allows for the net profit for the corresponding period to be paid.
- The increased costs, including the expenses of operating in a temporary location, whilst repairs to the permanent location are being completed following an insured event, if it is economical to do so.
Considerations for business interruption insurance cover
- BI insurance cannot usually be bought alone and insurers will insist that there is a material damage policy in force to be able to purchase it. It is normally available as part of an overall package such as a shop insurance or office insurance policy.
- Purchasers must also determine that the package policy’s standard sum insured and maximum indemnity period is sufficient to cover the gross profit that you could lose and the amount of time it will take for the business to recover following a major loss.
- The price of the cover depends on the size of the risk and a number of factors are taken into account when calculating the premium. This includes the business activities, location, sum insured (gross profit), maximum indemnity period and how easily the business could function at an alternate location.