They say that cash flow is king, so protecting your business’ ability to pay its bills after a loss is crucial.
The interruption to trading following a fire, theft, significant water damage or other insured event can often have more serious financial implications for you and your business than the actual loss or damage itself. That’s where Business Interruption Insurance comes in.
Business Interruption typically helps cover the shortfall in your Insurable Gross Profits caused by interruption to the business or increased cost of working, due to an insured event at one of your insured locations. This type of cover enables you to keep paying your bills and cover additional operating expenses at a time of loss to keep your business afloat while you rebuild.
The policy is vital in helping businesses stay afloat while you set up temporarily in another location, wait for building approvals, ensure you can pay and retain key staff until the business reopens, and/or cover the cost of advertising to let your customers know when you have reopened and are ready to trade again or where you have relocated to.
CGU Insurance recently surveyed nearly 500 small businesses and found that:
- 25% would not survive if they had to close their doors for three months
- 25% of small businesses would have to shut down if they experienced a business disruption (such as fire or storm). This figure jumped to 38% if the disruption occurred during a busy period in the year
- 1 in 7 businesses experienced a shortfall in income because of a business interruption in the past 12 months.
Business Interruption has also been named as Allianz’s major risk for businesses for the 7th year in a row, yet despite all of these findings, less than 25% of businesses have some form of Business Interruption cover in place.
Compounding these alarming stats is the issue of a large number of clients who have business interruption failing to update their sum insured as their business changes, or incorrectly using their accounting gross profit instead of their insurable gross profit.
THINGS TO CONSIDER
If a major event occurs, your business may be unable to operate, or may only be able to operate at a reduced capacity. During this time, you will continue to incur operating costs such as rent or mortgage repayments, salaries and utility expenses. You may also incur costs directly associated with minimising your overall loss.
There are traditionally two methods of insuring your Business Interruption based on factors such as whether you are location specific or not, your business continuity and disaster management plan, along with various other factors, and it is important to consider this when choosing which type of Business Interruption cover is appropriate for your needs.
Where your business is location specific and would be unable to re-open and/or continue to generate income in the event of a major loss, it may be appropriate to take out Insurable Gross Profits. Again, Insurable Gross Profit is different to an Accounting Gross Profit, so having an adviser assist in calculating this is crucial. Dependent on the circumstances at hand at the time of claim, Insurable Gross Profit can be used in a variety of ways. These include Gross Profit or Increased Costs of Working, (not to be confused with Additional Increased Costs of Working).
Where your business is not location specific, or the majority of your business operations are conducted away from your office or insured premises, the appropriate method of insuring Business Interruption may be through Additional Increased Costs of Working. This method of insuring Business Interruption provides the ability to continue trading while the additional increased costs to do so are covered by your insurance, such as the increased rental costs for a temporary location, removalist costs for relocating your business and/or increased advertising costs to keep your customer base informed of your current location.
Businesses that are heavily reliant on plant and machinery or have specialised or imported machinery may also want to include Business Interruption cover under their machinery breakdown policy.
COVER FOR DAMAGE TO PREMISES YOU DON’T OWN
You rely on suppliers and customers to run your business, so a loss that significantly impacts them can have flow on effects for you. Your business can suffer interruption when some type of damage occurs to premises that you do not own (such as your key suppliers or customers), damage to public utilities, or loss of local attractions. Your Business Interruption policy can be extended to provide protection from these indirect exposures when the damage to their premises is an event that you would typically be covered under your own Business Insurance policy. There are a variety of other additional similar benefits that may provide critical cover in the event of an occurrence at a location other than at your premises.
SELECTING THE RIGHT INDEMNITY PERIOD.
Selecting the right indemnity period is absolutely crucial! The Indemnity Period is the period of time you believe it would take for your business to fully recover following the damage or loss. This is not only the time to rebuild, repair or replenish damaged contents, machinery or stock, but also the time for approvals, to train staff on how to use new plant and equipment, or to win back or replace customers you lost while you were unable to operate. Your adviser can help run through some potential scenarios you may face and guide you through this process.
CALCULATING THE RIGHT INSURABLE GROSS PROFIT
So how much cover do you actually need? Unfortunately, it isn’t a straightforward answer as you need to take into account a vast range of factors. An experienced insurance broker or adviser will work through your business’ financials with you to help calculate an accurate Insurable Gross Profit, taking into account business trend and determine what situations your business may face, what costs you may incur or need to consider at the time of a loss.
It is important to note that underinsurance also applies with Business Interruption insurance, so ensuring you have the correct Insurable Gross Profit calculation and indemnity period is essential.
To find out more about this crucial type of cover, contact the allinsure team to speak to an adviser today.
GENERAL ADVICE WARNING
THE INFORMATION PROVIDED IS TO BE REGARDED AS GENERAL ADVICE. WHILST WE MAY HAVE COLLECTED RISK INFORMATION, YOUR PERSONAL OBJECTIVES, NEEDS OR FINANCIAL SITUATIONS WERE NOT TAKEN INTO ACCOUNT WHEN PREPARING THIS INFORMATION. WE RECOMMEND THAT YOU CONSIDER THE SUITABILITY OF THIS GENERAL ADVICE, IN RESPECT OF YOUR OBJECTIVES, FINANCIAL SITUATION AND NEEDS BEFORE ACTING ON IT. YOU SHOULD OBTAIN AND CONSIDER THE RELEVANT PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISION TO PURCHASE THIS FINANCIAL PRODUCT.