Business Interruption Insurance
Business interruption insurance (also known as business income or business continuity insurance, loss of profits insurance or consequential loss insurance) covers the loss of income that a business suffers after a claimable event while its business is either closed, in the process of being rebuilt or suffered partially from the event.
A property insurance policy only covers the physical damage to the business, whilst business interruption insurance is designed to cover the loss of gross profit or revenue and additional costs involved with the claim. It is providing protection against the interruption to the business turnover. The purpose of the cover is to ensure that the business income doesn’t deteriorate from a claimable event by providing the shortfall in revenue or gross profit.
An interruption to any business can have disastrous consequences for not only that business but for suppliers, customers and staff. This quickly affects the business viability and increases business owner and management stress levels whilst attempting to effectively carry out the business continuity plan. Depending on the size of the business and if it is divided into departments, staff may need to be reallocated, stock transferred, council negotiations undertaken, all whilst worrying about the business turnover and viability.
Unfortunately, research reveals that 85% of small businesses believe that they have “adequate” insurance for their businesses.
But of these businesses:
- 13% did not have fire insurance
- 20% did not have burglary insurance, and
- 13% did not have businesses interruption insurance.
Source: Cameron Research Group ‘The Australian Small Business Market for Financial Services 2008:Insurance and the Small Business Market’ June 2008
Many SMEs have insurance, but are under-insured.
Commercial insurer CGU says:
- 65% of small businesses have no business interruption cover
- 47% do not adequately insure their stock and contents, and
- 82% of businesses that own buildings do not insure them appropriately.
The costs associated with retaining customers and market share and cash-flow may create a drain on the financial resources of a business already stretched because of the material losses. It is to offset these costs and expenses to maintain the turnover/revenue that all businesses should take out business interruption insurance cover.
Even more alarming is that it is estimated that of those businesses that do have business interruption cover, over 42% of them have inadequate cover and over 26% of them change brokers following a claim when their business recovered. (ICA 2002)
Other problems suffered by businesses as the result of an interruption which affect trading profit by reducing income revenue and/or increase costs include:
- loss of profit margin on stock destroyed (stock insured under property cover, profit margin payable under BI cover)
- dislocation and disruption of most general business activities
- a reduction in net profit – possibly a net loss from increased expenses
- non-fulfilment of standing orders
- breaking of contracts
- loss of peak income during seasonal periods
- loss of customers to competitors
- certain continuing expenses, for example, rent, payroll, interest
- additional expenditure in order to minimise loss of income to customers. e.g. rental of temporary operating premises, or working additional shifts
- the availability of replacement plant and machinery or parts for damaged plant and machinery
- ongoing inability of the business to attract customers – loss of draw-cards or prevention of access
- a reduction in net profit – possibly a net loss from increased expenses
Business Interruption Insurance had traditionally been an extra policy section taken with your main Business or ISR policy. Development over recent years has seen an increase in standalone policies which are independent of the primary insurance policy and have been designed to respond to claimable events with the main focus on risk minimalisation, containment of the loss and application of funds to ensure the business reaches its pre-claim level of trading revenue and gross profit.
The following areas are typically covered under a business interruption insurance policy:
- Loss of gross profit, which incorporates loss of output and/or loss of rental income
- Fixed Expenses reimbursement that allow the business to continue operation (Extra Costs)
- Failure of all utilities including the entire delivery network
- Prevention of access (in the immediate vicinity)
- Suppliers’ and customers’ situations within Australia
- Registered vehicles (whilst at the situation)
- Loss of attraction / drawcard business
- Murder, suicide and human infectious diseases
- Costs incurred with relocation including bonds, connection fees, legal and council fees as well as moving costs.
- Cost of relocation to the original situation (Optional)
- The cost of preparing claims and professional fees associated with it. e.g. accounting, bookkeeping, consultancy fees.
Most business continuation insurance policies also include clauses to protect your Buddina business against loss from:
- Customers premises damage
- Suppliers premises damage
- Government or emergency response closure or ingress/egress closure
That’s great but what isn’t Covered?
Although each insurer has its own policy wording, the insurance industry in Australia has adopted similar approaches to what is excluded including:
- Loss of gross profit where no material damage cover exists
- Electrical, electronic and/or mechanical breakdown or breakages – separate cover available
- Flood (but may be considered on request)
- Exclusions noted on existing material damage cover
- Data recognition
In its basic form, Business Interruption Insurance is the cover provided to ensure continuation of the business income after suffering a claimable event usually fire, storm or burglary damage.
Business Interruption cover ensures the continuation of your gross profit within the business to enable you to continue paying of fixed expenses with the business.
Most losses are only partial and can be more detrimental and impact more on your business and emotionally then a total loss.
Risk management of your business should include the real consideration of a correctly written business interruption cover. Unfortunately in real life up to 87% of SME business do not take the coverage and of them it is estimated that over 70% of them have the incorrect cover mainly due to errors within arranging the cover:
Underestimating the Business Interruption Insurance cover required
- Incorrect reinstatement (indemnity) periods mainly due to underestimating the time to reinstate the premises, equipment
and regain customers
- Relying on incorrect, inaccurate or out of date accounting and bookkeeping records
- Failure to understand what triggers the Business Interruption policy
- Failure to factor in seasonal business fluctuations
- Lack of expertise by the insurance broker
- Failure to structure the policy for the specific business and the other insurances in place
Unfortunately most businesses that suffer an insurable loss such as a fire or storm damage do not recover and often struggle to a stage where they either sell or close.
Without the correct cover and a capable insurance broker who can correctly calculate the business interruption cover required, our business is at risk of having spent money on cover that will not respond correctly and severely add to the interruption.
If your SME Business Insurance Broker is not requesting the following items, I would hesitate to add that they may not fully understand the cover and will ultimately lead you to an experience should you have a claim that you would rather not have.
Business Interruption Information Requested Checklist
- 3 years Profit and Loss Statements – Accountant copies or audited
- Recent Balance Sheet
- Full details of your financial accounts and client details backup system
- Full history of your business and claims history
- Full description of the business premises and business activities
- Full description of adjoining business risks
- List of premises and turnovers applicable to each
- Full identification of who your major suppliers are
- Full identification of who your customers are
- What utilities your business is reliant on – Gas, Electricity, water, sewerage, Solar etc.
- Future trends or contracts you have in place/planning for period of the insurance cover plus the indemnity period for forecasting the cover required.
- Business Continuity Plan
All too often we see business interruption cover written using just the businesses Gross Profit from their “available” P&L Statement as a shortcut to working out the correct cover. These brokers are relying on the policy wording and the ‘hope’ of nothing happening to get them through a claim. In a recent example we worked through this approach equated to being under-insured by 25% and having insufficient policy extensions to cover a loss.
The benefits of correctly structuring a Business Interruption policy include:
- No loss of gross profit
- Retention of staff and payment of wages
- Specialist assistance with minimising losses
- Temporary Premises
- Alternative utilities – convert electricity to gas etc.
- Relocation strategy and payment of expenses implemented
- Ability to outsource and keep contact obligations
- Ability to continue financial arrangements with lenders and
gain more capital if required
However, all is not lost. Even if you have an existing cover, we at Insuring theProduct can arrange a full review of the policy and sums insured to allow you to correct the situation.
We also are able to place standalone Business Interruption cover as a policy even when we don’t write the rest of your SME Business Insurances.
Alternative business interruption covers exist as well for specialist machinery, electronic and computer systems, deterioration of stock and construction risks.
Nothing can replace professional expertise advice from an experienced Specialist Insurance Broker.
To arrange a full discussion and quotation on Business Interruption Insurance and how to protect your business from lost cash-flow contact us Today on 07 5313 7871 or complete the short form below. We serve Buddina, Buderim and all areas in the Sunshine Coast and Brisbane, QLD.
Looking for a Full Business Interruption Review? Then learn about our comprehensive Business Interruption Insurance Review Process.