Business Interruption Insurance: What You Need to Know
Business interruption insurance is insurance cover that replaces your business’s income lost because of an event that prevents the normal operations of your business. These interruptions include natural disasters and fires, among others.
Insurance companies typically don’t offer business interruption coverage as a separate policy. Instead, it is often included as part of a comprehensive policy package or as an addition to a casualty or property policy. Business interruption insurance is often misunderstood or under-insured, therefore it is ideal that you discuss this insurance cover with an insurance broker, such as Fleurieu & Hills Insurance.
How well is your business covered in the event of a disaster such as a fire in the premises?
How Business Interruption Insurance Works
In a nutshell, business interruption insurance coverage helps protect companies from severe losses in cases of serious incidents. The severe financial losses that your company may incur because of long-term interruptions can force you to shut down your business.
Many sources can trigger long-term business interruptions. These include disasters like floods, damage, and even fires, as well as man-made threats such as cyber-attacks.
Why Your Business Needs Business Interruption Insurance
As a small business owner, one of your major responsibilities is to make sure your company survives through the growing pains and any setbacks you may encounter.
Business interruption insurance cover can prove to be a valuable tool in keeping your business afloat due to unforseen circumstances. This insurance may spell the difference between recovering from a damaging event and a permanent shutdown.
You should treat business interruption insurance for small business as something as important as fire or flood insurance.
Unfortunate incidents like floods, fires, damage and lawsuits may result to temporary closure of a business. The machinery or building may likewise be rendered unusable for a while. Aside from insuring your business for these events, you should consider interruption coverage.
Following a disaster, a business shutdown will cost your company a significant amount of money in terms of lost revenues. Because you cannot provide your customers with the products and services they need, they will turn to your competitors. If your customers are happy with what they get from other companies, then they would most likely no longer come back to you – even after you reopen.
The insurance policy covers any lost revenues in case you are forced to close shop temporarily. The revenue will be estimated based on the previous year’s average as reflected in your company’s financial records. The insurance coverage also includes expenses that your business continues to incur even when there are no operations.
Examples are the utility bills, insurance lease costs etc.
When including business interruption cover to your property insurance policy, make sure that the maximum limit is sufficient for your expenses at the very least.
You may need to adjust the insured amount when you renew your business insurance, especially if you are running a growing business.
One common mistake people make is getting insurance for an inadequate period of time. When your business is forced to temporarily shut down, it may take months or even a year or more, before you can go back to normal operations. It is also important to mention that coverage for business interruptions often doesn’t start until about 48hrs after the stoppage.
The cost of coverage depends on the location and nature of your business. If you are running a real estate company, your property insurance should cost less compared to a restaurant business in a fire risk zone.
A business interruption insurance policy should also consider how fast you can run your business elsewhere.
Coverage also includes extra expenses. The insurance company will reimburse you for the money you spend exceeding your average operating cost. This will help reduce the interruption cost of your business. In some cases, the extra expense cover alone may be enough to compensate for the losses – even without business interruption coverage.
What To Consider When Selecting Business Interruption Insurance
There are numerous common under-insurance blunders that you need to avoid. Here are some tips:
- Projected Growth –
If your company is fast-growing, you must document and prove the income growth during the months before the disaster struck. This way, your projections will be more accurate than just basing your claim on the previous year’s performance.
- Utility Expenses –
Loss of utilities may follow right after a disaster. Along with other fixed costs, utilities are often neglected when accounting for business interruption losses. If your operations rely heavily on power, water, oil, gas, or other utilities, having a business interruption insurance policy is vital. After all, even if you are on a temporary shutdown, your utility expenses will still add up. A business interruption policy will help cover for them.
- Additional Clean-Up Cost –
A disaster like flood or fire may result to additional expenses in terms of additional work or machinery replacement. To anticipate for these extra burdens, you can include a policy extension that will cover the expenses you incur in excess of the usual working costs.
These may include temporary space rental and additional wages for employees who will help during the clean-up. The additional cost is necessary to prevent further losses from the disaster.
- Access Prevention –
If it will take some time for you to gain access to your premises, like in case of a serious flood, you can expect delays and loss of revenues. To compensate for the losses, you can have “Prevention of Access” coverage included in your insurance policy.
Estimating Your Business Insurance Coverage
Calculating the amount of business interruption coverage may be difficult. The standard maximum indemnity period of 12 months is often used. But, to be more realistic, it is best to get a policy for at least 18 to 25 months.
While the process of estimation may be difficult, the time you will take to get things right will be worth it in the unfortunate event of a disaster. Consider the amount of time to rebuild your premises, replenish your inventories, and get your operations back to normal. You may also lose difficult-to-replace skilled workers because of the interruption.
The amount of coverage necessary for your business will depend on your specific requirements. You may be unable to resume operations as usual for some time if your stocks, service, and equipment can only originate from a specific location. Or, if your business doesn’t rely heavily on physical factors, and you can operate from a different location, you may be able to resume operations right away.
To avoid under insurance and bigger losses, it is best that you consult with your local Adelaide business insurance broker for advice. Although business interruption coverage is only optional, its importance for your business will depend on your risk exposure. It is not completely unnecessary if your company is at risk.
How Much Insurance Cover Do You Need?
There is a coverage limit for business interruption insurance. It is the maximum amount that you insurance company will pay for a claim. You will shoulder any financial loss that exceeds your maximum coverage limit. Thus, it is imperative that you determine the appropriate coverage limit for your business.
Following are a few factors to consider when deciding on the business interruption insurance coverage limit:
- How soon can you get back to normal operations after an interruption?
- If you are leasing your premises, is your building well-protected?
- Are the sprinkler systems in your premises functional and up-to-date?
- Is there a comparable and readily available commercial space near your current location, or it would take a long time for you to find an acceptable location?
It is also a good idea to consider the length of time you will need to restore your business following an interruption. This will help determine how much income you stand to lose. It may vary, depending on the gravity of the loss you company experiences. A small fire, for instance, may require just a 30-day period for restoration. On the other hand a major earthquake may take months to recover from.
More Information About Interruption Insurance
The premium for a business interruption insurance policy or the additional cost for a rider is tax deductible just like any regular business expense. The policy will only pay out if the cause of the lost income is included in the coverage of the underlying casualty/property insurance policy. The payout is typically based on the business’s past financial records.
The coverage will extend throughout the business interruption period that is set by the insurance policy. Most policies determine the period as beginning on the date of the incident occurred, and the property damaged has been repaired and returned to normal operations.
What Items Are Cover By Business Interruption Insurance?
Following are the items included in a business interruption insurance coverage:
- Profits –
Reimbursement for lost profits will be paid based on the prior month’s performance of the business.
- Fixed Costs –
These include normal operating expenses, as well as other business costs.
- Temporary Location –
Some insurance policies include the costs of moving to, and doing business from a temporary location.
- Commissions and Training Expenses –
In the aftermath of a business interruption incident, a business will often require replacement of damaged machinery, and training of staff who will use the new equipment.
- Additional Expenses –
The insurance coverage will reimburse reasonable expenses on top of the fixed costs that the business incurs in the process of getting back to normal operations.
- Civil Authority Ingress/Egress –
The disruptive event may result to a government-ordered closure of the company’s premises. This will directly cause loss of revenue. For example, the government may issue street closure orders or curfew relative to a disaster.
- Salaries and Wages –
This may be necessary for the business to retain its workers even while on a temporary shutdown. The insurance policy can help the company pay for employee wages even when there are no operations.
- Taxes –
Being struck by a disaster does not exempt a business from paying taxes to the government. Having sufficient business interruption cover will help the business meet its tax obligations.
- Loan Amortisations –
Payments for loans are often paid on a monthly basis. Business interruption insurance can help the business make regular payments to its lenders.
Limitations Of Standard Insurance Policies
Typically, a standard business insurance policy will only cover damages or losses to tangible assets like inventory, equipment, store, office, or warehouse. A standard policy will not pay for lost profits because of the business’s non-operation.
To get coverage for lost income, you need to have business interruption cover included in your business insurance policy. You will need to document and prove your income potential. Be alert for business interruption insurance policies that may insist on low per-incident limit, especially if you have a substantial profit.
Some insurers may attempt to cap your limit to an amount that is way under the amount you need.
Depending on the nature and location of your business, a business interruption insurance policy may be a necessity for your business, and not just an option.
To make sure that you get the right coverage for your business, it is best that you set an appointment with one of our business insurance brokers, contact a member of our team here.