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Business Interruption – Are you adequately insured?

After a serious loss, Business Interruption insurance is often the stark difference between a business surviving or not.

Often Business Interruption Insurance (BI) is treated as a rather poor relation in a company's insurance portfolio. This should not be the case.

In its fullest and recommended form BI, when arranged correctly, is in place to restore the business to the same financial position after the loss as if the incident had not occurred in the first place. Failure to do so can leave huge gaps in your cover at a time when the business is under enormous financial pressure.

To be effective the BI cover needs to reflect all aspects of the business, have an adequate sum insured, be allocated an appropriate indemnity period, and have all relevant cover extensions considered and applied where appropriate.

Business Activities

The business description must incorporate all revenue earning activities, including any changes which occur during the policy year rather than just reviewing when the policy is first purchased or renewed.

Sum Insured

A complex and often misunderstood term, "insurable gross profit" needs to be carefully assessed as it is often not as simple as lifting it from your own set of accounts. We can advise you on this but typical errors include not incorporating manual wages in the sum insured, and not accounting for growth trends in the business.

Take a typical scenario. You provide an estimated gross profit based upon your set of accounts from 31/12/2010. Your renewal is 30th September 2011. The business is growing because you are expanding in a new exciting and very profitable sector. Your indemnity period is 24 months. A serious fire occurs in July 2012 and you are looking for your policy to provide cover for 2 years from that date ie through to July 2014. You can see that being under-insured in these circumstances is highly likely unless proper attention to the sum insured has been given at the outset.

A declaration basis is good as it provides an uplift of say 25% from the estimated gross profit. At the end of the year the actual gross profit is declared and the premium adjusted accordingly on a retrospective basis – up or down.

Indemnity Period

You need to consider the whole spectrum of timescales to understand the amount of time a business may take to recover from a serious loss. Factors include: -

  • Demolition and site clearance including complications such as environmental problems
  • Designing replacement build, obtaining planning permission, arranging competitive tenders
  • Scheduling building work and keeping construction "on time"
  • Lead times for replacing equipment
  • Re-staffing and re-training
  • Once up and running again, recovering the business to its pre-loss trading position including taking account of seasonal factors where relevant

Cover Extensions

Some policies incorporate a range of extensions automatically but the range of these extra covers and adequacy of limits applied needs to be reviewed to ensure they are appropriate for your business. Typical extensions include: -

  • Denial of access to or exit from the building caused by an insurable incident in the vicinity.
  • Check your policy to see if this is restricted to property in the area or limited to a specific radius from your premises.
  • Loss of utility availability – power, water and telephone/internet communications. Check that your cover applies to damage occurring at any point in the supply line rather than just at land based premises of the supply authority.
  • Premises of key customers or suppliers. If your business could be affected by damage occurring at other premises which can lead to either not being able to access key materials or not being able to supply a large customer, these extensions may be essential.
  • Breakdown of key machinery or plant items.
  • "Advance Profits" to include projects either planned or under construction where damage will affect anticipated future income.
  • Serious health issues or murder or suicide occurring at your premises or in the immediate vicinity.
  • Fines and penalties clauses within contracts can be insured if inability to comply is related to an insurable incident – details may need to be specifically disclosed.
  • Additional Increased costs of working (AICoW) – this is a very useful extension aimed at providing extra funds to enable continuity of supply of goods and services to your customers. Insurers provide ICoW cover automatically but only up to the "economic limit" – this means they will spend an extra pound to save a pound of lost revenue. But there may well be circumstances where your business is desperate to maintain sales and prepared to spend beyond this limit in order to preserve your customer base and maintain your position in the market to the maximum extent you can.

Business Continuity Planning

Thinking ahead and making plans for significant incidents is a sensible approach. Indeed appropriate continuity planning is a key governance responsibility incorporated within the Companies Act 2006.

There are many available documents and software tools or consultant advisors who can assist you in preparing a plan. Please ask us for assistance or advice. A good continuity plan will include the following headers : -

  • Identify the potential crises that might affect you
  • Determine how you intend to minimise the risk of these disasters occurring
  • Set out how you'll react if a disaster occurs in a business continuity plan
  • Make arrangements to test and update the plan periodically

Published 28th November 2011

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