Business Interruption

According to the Insurance Information Institute, more than 25 per cent of all businesses that close down following a disaster never open again. With advanced planning, there are measures you can take to protect your company’s bottom line.  To safeguard your business, consider Business Interruption cover, an insurance cover that funds the restoration of your business operations after a loss.

Business interruption cover can vary from policy to policy. You need to make sure that you select a policy that properly protects your business.

Business Interruption. This is designed to replace income your business would have incurred had no loss occurred. Business Interruption is generally defined as the net profit or loss before taxes, plus continuing normal operating expenses, including ordinary payroll (payroll for employees other than officers, executives, department managers or employees under contract). Cover is generally limited to the loss of income sustained until the property is restored, and/or a specific timeframe following the loss.

• Specific Items to Consider:

It’s important to review ordinary payroll annually. In the past, manufacturers chose not to insure their direct labour costs—unskilled labour was easily replaced. Consider if that’s still true in your marketplace today. Review your projected timeframe for resuming business. After a major loss, getting up and running takes much longer than you may anticipate and can cost much more, too. You may be back in business but your customers are still going to your competitor. An Extended Period of Indemnity extension may be necessary to give you more time to restore your business to pre-loss level.

Increased Expenditure. This is designed to pay for necessary expenses incurred during the period of restoration of the property. Increased expenditures include those necessary to continue operating the business at its original location or at a temporary replacement location until the original location is repaired.

• Specific Items to Consider:

Not all businesses would lose customers after a major loss. For example, a law firm would retain its clients, and there would still be a flow of revenue; however, the costs involved in renting new office space, moving, and hooking up new phones and computers is considerable.  Transitions are more expensive than you think. Increased rent, employee overtime, and moving costs are examples of increased expenditures that service organisations should consider insuring.

Contingent Business Interruption. This is an extension of cover designed to cover loss of income your business incurs due to a property loss at a key supplier or customer location. For example, if a key supplier experiences a fire at its plant and is unable to deliver parts or goods necessary for the continuation of your business, you may have a claim for a contingent business interruption loss.

• Specific Items to Consider:

Contingent Business Interruption is the most overlooked area of exposure to loss. Your interdependency on your supplier (under contract or not) or one large customer could put your business in jeopardy when that party suffers a major loss. Contingent Business Interruption cover can fill this gap.

Finally, complete a Business Interruption Worksheet every year to review all your exposures. The Business Interruption Worksheet requires financial information for the current year as well as projection into the next year. The projection portion is often skipped, but trying to see into the future is important for setting proper overall limits.

Considerations for Business Interruption Insurance

• Business interruption insurance cannot be purchased on its own—it must be added to an existing insurance policy, such as property or office insurance.
• Purchasers must also determine that the policy’s maximum indemnity period is sufficient to cover the amount of time it will take for the business to recover following a major loss. This includes considering the worst damage or disaster that the business could incur, estimating how long it will take to repair or replace buildings, machinery and stock, and determining the length of time it will take to recover customers and market share. Typical maximum indemnity periods range from 12 months to 36 months, in 6 month increments.
• Price of cover depends on the risk of disaster to the premises. This may depend on the business location, nature of the business and how easily the business could function at an alternate location on a temporary basis.
• Do not miscalculate gross profit. The definition of ‘gross profit’ for insurance purposes differs significantly from an accountant’s understanding of the term. As a result, businesses frequently declare incorrect figures, resulting in underinsurance.