If a fire causes the facility to be temporarily unusable, what would you do next? Would your business be able to pay utilities, wages or any other standing charges without any income?

It could take months before the damaged property is rebuilt and stock, machinery and equipment are repaired or replaced.

Ideally, you would move to a temporary location while your permanent place of business is being repaired. Yet, traditional Property Insurance does not cover this move or a loss of income when a business must temporarily close. With Business Interruption Insurance, this setback can be minimised by simply adding this cover to your Property Insurance policy.

What can be included in a Business Interruption Policy?

  • Compensation for lost income if the business has to vacate its premises as a result of disaster-related damage covered under a Property Insurance policy.
  • Compensation for the gross profits that would have been earned based on previous financial records, had the major loss/peril not occurred
  • Covers operating expenses, such as utilities, that must be paid even though business temporarily ceased.
  • Covers the increased cost of working, including expenses of operating in a temporary location while repairs to the permanent location are completed.

Considerations for Business Interruption Insurance

  • Business interruption insurance cannot be purchased on its own—it must be added to an existing insurance policy, such as property or office insurance.
  • Purchasers must also determine that the policy’s maximum indemnity period is sufficient to cover the amount of time it will take for the business to recover following a major loss. This includes considering the worst damage or disaster that the business could incur, estimating how long it will take to repair or replace buildings, machinery and stock, and determining the length of time it will take to recover customers and market share. Typical maximum indemnity periods range from 12 months to 36 months, in 6 month increments.
  • Price of cover depends on the risk of disaster to the premises. This may depend on the business location, nature of the business and how easily the business could function at an alternate location on a temporary basis.

Miscalculating Gross Profit

Inadequate business interruption insurance cover can seriously impact the ability of a business to recover following a loss.

However, business interruption is a notoriously difficult area to understand and The Insurance Institute of London estimate that around 40% of policies are underinsured. This is something that we see ourselves on a weekly basis when asked to review the existing insurance cover for new clients.

The problem arises due to misunderstandings of the term ‘gross profit’. The definition of ‘gross profit’ for insurance purposes differs significantly from an accountant’s understanding of the term. As a result, businesses frequently declare incorrect figures, resulting in underinsurance.

Committed to delivering best practice in all that we do, we aim to ensure such a scenario never arises. Drawing on our industry knowledge and utilising the latest software, including business interruption calculators, we take a methodical approach to gross profit calculation, enabling us to help you accurately assess the level of business interruption cover you need to have in place.

We will work closely with you to look at all eventualities, ensuring your indemnity periods are set accordingly. A common mistake is assuming that 12-months is all it will take for a company to be back up and running.

Throughout the process, we will clearly explain key terms, ensuring you understand exactly the information required and whether there are any other factors you need to consider. In this way, we are able to arrange the optimum solution for your needs, ensuring your business and interests are adequately protected, whatever happens.

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