Business Interruption Insurance is also known as Loss of Profit or Consequential Loss cover and is pivotal to the future of a business if serious physical damage occurs which is covered by the underlying material damage perils.
It is almost impossible to overestimate how vitally important this form of cover is to the future of your business: it is an important component of your future and should be carefully thought about and planned.
The cover is concerned with paying for the consequences of the physical damage loss and enables the insured to recover loss of gross profit due to a reduction in turnover and reasonable additional expenditure incurred in minimising a reduction in turnover – like overtime, for example.
Different forms of cover are available, depending on the nature of the business. Gross Profit is suitable for most industrial and manufacturing businesses, but others, where turnover is generated ‘away’ from the premises, or where the business is not dependent upon a fixed site may be suitable for ‘Increased Cost of Working’ cover – i.e. the cost of keeping the business trading whilst temporarily disrupted – like alternative accommodation.
There is no overarching definition of Gross Profit, it can vary from business to business, trade to trade, but what is important is to make sure that provision is included within sum insured for payment of wage roll for at least key staff.
Irrespective of whatever accounting basis is used within the business to calculate gross profit, the objective of the insurance is to make up for a period of lost trading time and the insurance provision must go deeper than a simple abstraction from the business accounts.
Some businesses deduct labour costs, for example, in their gross profit calculation, others do not – the difference in future planning for business interruption insurance is massive. In terms of calculating the sum insured, you should imagine the ‘damage’ occurs on the last day of the insurance year and project future profits forward from that date.
MAXIMUM INDEMNITY PERIOD
Thought must also be given as to what would actually happen in the event of a major disaster that interrupted ongoing business. It needn’t necessarily be a disaster at your own business premises.
Remember the indemnity period is supposed to return the business to the level of turnover enjoyed immediately prior to the disaster.
The Business Interruption indemnity period runs from the date of the damage until the end of the stated indemnity period, so this period will need to be sufficiently long to enable turnover to return.
Most serious physical damage will not be repaired within 12 months, so the indemnity period should never, in our view, be less than 24 months, possibly longer depending upon the businesses individual circumstances.
Factors affecting the Indemnity period are:
- The competence of the management team
- The possibility of outsourcing
- The disaster recovery plan
- Retaining the key personnel
The site layout is important, too – is there spare space? The site location may not be suitable going forward, the building may be inappropriate going forward or the business may be location bound – i.e. irrelevant on a different site. Or there may be issues around the ability to replace damaged plant in reasonable timeframes.
Tenants may have a lack of control over repairs.
DECLARATION LINKED POLICIES
A declaration – linked policy gives an automatic uplift to the sum insured at the time of a claim – typically 130% of the sum insured is adopted. This is to accommodate unforeseen growth in the business during the trading year before the declaration based sum insured is next declared.
It is important that the underlying sum insured is accurate at inception.
Common policy clauses and extensions would be:
- Payments on account:
- Suppliers extension:
- Customers extension
- Denial of Access
- Public Utilities Business Interruption Insurance for business
- Murder, Disease, Suicide
Not all Consequences are covered:
- Customer penalties (supermarkets)
- Wasted Costs (pre -incident marketing)
- Under Insurance in material damage sums insured may affect a profits settlement and if the sums insured are significantly understated, the whole claim may fail.
- Landlord’s intransigence
- Post Loss Improvements
- Gossip and Blemishing