Most businesses would be unable to continue trading if their premises, stock, critical machinery or computers were damaged in a disastrous event. In the event of a natural or man-made disaster that causes damage to your business property this can all be lost. Whilst many businesses are quick to arrange their business insurance which covers their property and contents, business interruption insurance is often overlooked. Business interruption however can mean the difference between survival and closure if you do actually experience disaster. This form of insurance covers you for the period of profits that you will miss out on as well as continued expenses, such as loans and leases, you will still need to pay within the time it takes to get you up and running again.
The facts relating to business interruption insurance
Business Interruption Insurance helps to financially protect companies in the event of a serious incident. The consequential financial losses your business could sustain as a result of long term interruption in your trading can often lead to business termination. A surprising 40% of businesses fail to re-open following disaster due to lack of or miscalculated business interruption insurance. Statistics from the United States Small Business Administration indicate that over 90 percent of businesses fail within two years after being struck by a disaster.
Limitations of business interruption insurance
But before you get started there are a number of underinsurance mistakes that you should be aware of and avoid as a business. For example, if your business is growing quickly it will be important for you to document and prove the income that was accelerating month on month prior to the disaster, allowing for future projections to be accurate as opposed to your claim solely being based on last year’s profits.
You will also need to state the types of business interruption that you want to cover and you must also be insured against these disasters in your main business insurance policy. As a disastrous event, loss of utilities is often excluded, so if your business relies heavily on utilities such as electricity, water, gas, or oil, then you may want to consider adding contingency business interruption insurance.
You may find that you experience ‘increased costs of working’ or increased costs in replacement of machinery or plant as a result of whatever disaster your business has experienced. In anticipation of these instances it may be important to add an extension to the policy to cover the costs incurred which are in excess of the normal costs of working. Such costs may also include things such as additional rent on temporary premises, or additional wages for staff to assist in the clean-up. These increased costs will be deemed reasonable and necessary in order to avoid diminishing turnover or output as a consequence of the damage.
In some cases, such as serious flooding incidents, where you are unable to access the premises for some time it can cause further delays and loss of income. In order to be covered for this scenario then you will need to have a ‘Prevention of Access’ extension on your business interruption insurance.
Calculating business interruption insurance
Business interruption can be difficult to estimate. A standard estimate for the maximum indemnity period (MIP) is 12 months, but in reality when it comes to it, often this is found to be too short a period. Calculating business interruption insurance can be a difficult process, but the time taken to get it right will be well worth it should disaster strike. It is important to allow sufficient time to rebuild premises, replenish stock and rebuild a customer base. Seeking expert advice or enlisting an experienced broker is recommended to avoid underinsurance and potential business closure.