Business Interruption

Business Interruption Insurance is a key asset to a business but one that is often overlooked. Club Insure discuss what it is, why it is important and the key details.

Business interruption provides cover to protect your business against loss of income due to a temporary interruption in the business as a result of defined perils.

It is often included in, or offered as an optional extra to, business insurance packages which combine a number of different covers under one policy. It can also be offered as an optional extra to buildings and contents insurance policies. Property Insurance will only cover physical loss or damage to the venue and its contents, not the loss of income while repairs are carried out. The additional coverage provided by the Business Interruption Insurance policy covers the income that would have been earned, as the intention is to give a business financial continuity as if the loss had not occurred

Rapid resumption of trade after a disaster is essential and insurance to help stay afloat is vital. Even when your venue is temporarily unusable and the business is not producing income, you may still incur fixed costs.

There are three key elements to consider when deciding what level of Business Interruption cover will adequately meet your requirements: the basis of cover, the maximum indemnity period and the sum insured. In addition you must factor in to your decision how you would like it to respond in the event of a major loss.

Basis of Cover reflects how the settlement of claims money will be measured. Common methods of settlement include:

  • Loss of Estimated Gross Profit (Please note that the insurers definition of gross profit usually differs from the accountants definition)
  • Loss of Revenue
  • Increased Cost of Working
  • Additional Increased Cost of Working

Maximum Indemnity Period reflects the length of time for which benefits are payable under the Business Interruption policy.

The coverage extends until the end of the business interruption period, which is determined by you, the customer. Most policies define this period as starting on the date of the incident and lasting until the damaged property is physically repaired and returned to operations at the same trading levels that existed prior to the incident. Twelve Months is often considered the’ usual’ default period in which a business should realistically return to normal and turnover reach the level it was at prior to the loss. This is not always the case however, so serious consideration must be given to all factors that might affect the recovery period, examples of which include:

  • Forensic investigations by insurers and local authorities
  • Delays in gaining access to the site
  • Demolition of remaining existing structures/ buildings and site clearance
  • Re-design, preparation of plans and time taken for approval by relevant authorities
  • Tenders for rebuilding and awarding of contracts and the re-building itself
  • Landlord disputes
  • Seasonal fluctuations in the business
  • Re-capture of lost business
  • Contents/Machinery replacement lead in times
  • Additional time needed to comply with specific building requirements of National Heritage or a similar body

The worst case scenario should always be considered when selecting the indemnity period – we therefore suggest that a 12 month indemnity period is not adequate for most businesses.

Sums Insured. It is important to ensure that the Sums Insured used by the underwriters to formulate your premium and cover, are based on the calculations set out in the policy wording. They should also reflect the changes that are estimated to occur during the full indemnity period. This is imperative if you have selected an indemnity period longer than a single year, as it is common for the estimated gross profit for the next 12 months to be multiplied by the amount of years covered under the indemnity period. If you are forecasting to grow the business during the indemnity period then this can leave a shortfall between the Sum Insured and the real term expectations of future profits.

When setting the declared value you should also remember that an incident may occur on the last day of the current policy, meaning the actual settlement required would be the projections for the coming year, rather than the current accounting period.

If your policy is on a declaration linked basis then you may benefit from a limit representing 133% of the declared amount with no proportionate reduction applied (average).

And finally, it is possible to add extensions to your BI policy, for further information on this or any of the above contact us at Club Insure.