If one thing’s for certain, it’s that you can never be sure what the future will hold. That’s a fact of life and it is as true in business as in any other walk of life.
Unexpected events can arise at any time and, if you run a business, then you’ll be aware that even the slightest interruption can start costing you in lost income and profits before you know it.
That’s precisely why business interruption insurance is vital. It provides cover for loss of income during such times as you cannot trade as usual, due to some unexpected insured event. The insurance has the aim of getting your business back into the same financial trading position it was in prior to the event, as quickly as possible.
Generally, a business interruption insurance policy will cover you for disruption to business due to damage caused to your premises or equipment by fire, flooding or storms. It is also possible to arrange cover for interruption due to damage occurring on the premises of a customer or supplier, or because of access to your own premises being blocked to staff or customers by damage to premises in the vicinity.
Buying Business Interruption Insurance
Cover is usually sold as part of a business combined package. Some business owners assume this sort of cover is part and parcel of their commercial property insurance, but this is not the case as that will only cover physical loss or damage to contents and property.
The compensation available through business interruption insurance will cover any pre-tax profit shortfall and increased costs associated with running the business as a consequence of the unexpected insured event. These costs might include renting temporary premises or equipment and paying overtime to speed up recovery time.
The type of cover required will depend on the type of business. Generally, loss of gross profit will be required by businesses manufacturing, wholesaling and retailing goods, whereas loss of income/revenue will be required by businesses providing a service rather than a product.
Some business owners may be confident that their business will not lose income, regardless of the extent of the damage. In this situation, a restricted form of cover is available: Increase on Cost of Working. Rather than replace income, it pays only those extra expenses arising from the damage, such as renting a temporary office or equipment. This type of cover may be appropriate to an office based business with no specific equipment or location needs.
As with any commercial insurance, it is vital to have the policy tailored specifically to your business. Advice from a broker with experience in arranging such policies is crucial to ensure you have adequate and relevant cover.
There are two very important considerations to be made when arranging business interruption insurance.
Firstly, calculating the sum insured. Where the sum insured is set by ‘insurance gross profit’, a common misunderstanding is that this is the same as gross profit for accounting purposes. However, this is definitely not the case.
Insurance gross profit is defined as turnover less purchases, bad debts and any additional expenses, adjusted for variations in work in progress and year end stock. It is likely that during any downtime you will want to retain your key staff, so you will need to be able to cover their salaries too. So you can see the insurance gross profit figure is something you really need to be accurate on. Get it wrong and you run the risk of being under-insured leading to serious issues should you need to make a claim.
Secondly, it is vital to set the right indemnity period. This is the duration that begins at the time of the occurrence that resulted in the loss, up to the time when you are back to trading as normal. Think about this carefully, because it may take longer than you think. Winning back lost customers, reinstating supplier relationships, replacing stock and machinery, lead times on raw materials, sourcing alternative premises or re-building your own, getting back to normal production levels: all things you need to consider when setting the indemnity period.
The help you need for cover that’s right for YOUR business
Again, all this comes back to the need for taking expert advice when arranging your business interruption insurance policy. At Robert Gerrard we have been tailoring commercial insurance policies for our clients for decades and are on hand to help you arrange the right business interruption cover to suit your specific needs. To discuss your individual requirements, please get in touch.