Business Interruption Insurance
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What is Business Interruption Insurance?
If you can’t work because your property has been stolen, damaged or destroyed, business interruption insurance can make up for the money you lose while you’re unable to trade or additional costs you pay out to get back up and running.
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.
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, etc.
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.
Frequently Asked Questions
Whether you need business interruption insurance or not depends upon a number of factors. If you’re sure that a fire burning your premises down would barely affect your ability to trade – because you could be operating again in days from serviced offices, for example – it may not be necessary for you.
However, if you carry a lot of stock, or require substantial premises in order to operate, business interruption insurance could be the only way to stay in business long enough to get back on your feet.
You also have to consider factors such as customer loyalty. If you’re sure that you could survive being closed for a few weeks, then pick up where you left off, that’s great. The trouble is that even the most loyal customers will find new suppliers when you can’t help them; and while you might be trading again after a couple of months, the consequential cost of lost customers and sales in the long term could be insurmountable.
You can rest assured that in the event of a business interruption, we will work with you from day one to get your business up and running again as quickly as possible, and minimise any possible financial impact in the long term.
That’s largely because many business owners mistakenly believe that other insurances such as stand-alone buildings and contents policies will take care of everything if their operations are interrupted by events such as break-ins, floods or fires.
Business interruption insurance always includes what’s known in the trade as a material damage proviso which simply means that it cuts in following a claim made against your building or contents insurance, and covers financial losses that are a direct consequence of a business interruption, such as loss of revenue, loss of rental income and additional staff costs.
While there are many different causes of business interruption, the two most common are fire and flood. No one ever expects these twin disasters to strike their business, and when they do, they often mistakenly expect other policies to cover all of their losses.
A typical scenario for a flood claim won’t even involve heavy rain and a river that bursts its banks. Chances are that a pipe will burst or a rooftop water tank will collapse, and by the time you arrive in the morning your premises will be under three feet of water.
Well, stock can be replaced, eventually, as can computers. Yet a flooded building will often need at least two months to dry out, and in the case of a severe flood may take more than six months to be habitable again. Specialist machinery can sometimes take just as long to replace. If you cannot operate in the interim, you will lose revenue, possibly run out of money, and probably lose irreplaceable staff as well as valuable customers.
Yes, these are key areas of many business insurance policies. Make sure you insure your property for its full value and keep receipts or other proof of ownership.
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A Fair Presentation of the Risk
At the heart of insurance contracts is an obvious truth: you have an enormous advantage over the insurer. You know all about your business, its history, processes, people and management, but the insurer knows nothing – other than what you tell them.
You have a statutory duty to make a fair presentation of the risk. You must tell the insurer:
• Every material circumstance which you know or ought to know and/or
• Sufficient information that would cause the insurer to make further enquiries, if neccessary, to review those material circumstances
• You are deemed to have the knowledge of the company’s senior management.
• You are deemed to have the knowledge of the person arranging the insurance (who is deemed to be a senior manager under statute).
• Anything that can be discovered by a reasonable search.
A failure to make a fair presentation of the risk gives the insurer various remedies, depending upon the nature of the failure, from avoiding the contract and not paying claims to modifying the basis of settlement.
Examples of Misrepresentation
It is often easier to demonstrate the consequences of risk presentation failure by example rather than theory. Here are some real life examples of typically forgotten or unrevealed material facts which later caused huge problems and repudiated claims:
A reprocessing plant did not reveal a series of small fires during their insurance year.
Following repeated false alarms, a retailer didn’t reveal that Police Response had been withdrawn.
A restaurant omitted to reveal repeated minor floods from an upstairs nightclub.
A construction company didn’t reveal potential employee claims recorded in their accident book.
A company failed to reveal written warnings to an employee over repeated dangerous driving.
A company failed to reveal that it had been ‘struck off’ by Companies House and was trading as a new legal entity under a different designation.
Compiling the Risk Presentation: an ongoing process
The compilation of risk information for presentation to an insurer might be thought to be simply contained in a proposal or risk presentation form, however, such forms are not exhaustive and cannot take account of circumstances which change beyond their
compilation. Moreover, merely referring insurers to your website or dumping data is not making a fair presentation of the risk. ’Fairness’ is a subjective test but it would certainly involve simplicity, clarity and relevant selection.
Ongoing communication is vital, because the duty to disclose material circumstances is ongoing throughout the insurance year and at renewal of the insurances.
It is not possible to overstate the importance of researched, adequate risk presentation – there have been countless legal disputes, repudiated claims, ruined businesses and lives arising from the simple failure to reveal all the facts to an insurer. A failure to present risk adequately is a bigger risk than the risk you present.
It doesn’t matter that the failure is innocent, something overlooked, forgotten or discounted as unimportant – it might be important to the insurer, in which case it must be revealed.
Should there be anything not yet disclosed, or that you are unsure would influence your insurers about this insurance tell your broker/insurer immediately.
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The Business Insurance Bureau is a niche specialist underwriter and commercial insurance broker, defying conventional categorisation, comprising of a small number of gifted individuals forming a collective intellectual giant.
We have developed our own unique range of quality insurance products, which has given the business a competitive advantage in several areas. Being in control of the entire process, from enquiry to policy issue, has allowed our business to deliver service levels hitherto unimaginable in this sector, or indeed for a business of its physical size.
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