Demystifying Business Interruption Insurance
Business Interruption insurance is one of the most misunderstood and often overlooked covers that's available under a commercial combined insurance policy for businesses.
What is Business Interruption (BI) Insurance?
It covers businesses for loss of income during periods when they can't carry out their business as usual due to an unexpected event. For example, if a premises was flooded, or a fire or a break in occurred , BI insurance would put the business back in the same trading position it was in before the event occurred.
BI insurance includes a material damage proviso. What this means is that the cover will kick in following a claim made against your buildings or contents insurance, and covers financial losses that are a direct consequence of a business interruption, such as loss of revenue, loss of rental income and additional staff costs.
Business interruption insurance is often included in, or offered as an optional extra to business insurance packages which combine a number of different policies under one premium. It can also be offered as an optional extra to buildings and contents insurance policies.
- Businesses should consider buying declaration-linked insurance as it provides an uplift of 33%,providing that the sum insured and period of indemnity are both correct initially and declarations are made when requested by insurers;
- Accountancy and the insurance policy definitions of annual gross profit are different. Accountants define gross profit as ‘the residual profit after selling a product or service and deducting the costs associated with production and sale’ – and deduct all direct costs.Insurers define gross profit in the policy, for example; ‘the difference between the sum of income, closing stock and work in progress and the sum of opening stock, work in progress and uninsured working expenses’. Property and BI adjusters deduct variable costs and deduct uninsured working expenses often defined in the policy as, ‘purchases less discounts received, bad debts, rent and any other item described in the schedule’.These are examples of gross profit definitions; it is important to base the assessment of the sum insured on the definition in your policy wording.
- When thinking about an indemnity period for business interruption covers, remember that 24 months is likely to be the minimum period needed for a business to fully recover its trading level and to rebuild its customer base.
Let's consider a business that suffers from a flood. Their stock and computers will eventually be replaced, but, the building will need to be completely dried out and this could take anything from a couple of months and worse case scenario more than six months before the business can move back into the premises and start trading. If the business cannot trade, then revenue will be lost and may run out of money. Valuable customers may have to look elsewhere, which could result in the business making redundancies and could lead to the company going out of business.
Artemis Insurance Brokers can help to advise on the correct level of your businesses interruption insurance, so why not contact us today.
RICHARD J. CLIFFE - Sales & Marketing Manager
☏ 020 8619 5000