Business interruption (BI) insurance can cover you for loss of income, due to defined perils, during periods when you cannot carry out business as usual due to an unexpected event involving insured damage to your property. BI insurance aims to put your business back in the same trading position it was in before the event occurred
There are three main elements in ensuring that the BI cover is adequate for your requirements: the basis of cover the maximum indemnity period and the sum insured need to reflect how you would wish for the policy to respond in the event of a major loss.
Firstly, the basis of cover needs to reflect how you would like the settlement of claims money to be measured. This will be dependent on what will be the most effective method of ensuring that your business survives a major loss such as a fire or flood.
Common methods of settlement can include:
- Loss of Estimated Gross Profit ( The insurers definition of gross profit will usually differ from accounting gross profit)
- Loss of Revenue
- Increased Cost of Working
- Additional Increased Cost of Working
The Maximum Indemnity Period should be set to reflect the worst expected loss that might affect your business. You should estimate how long it will take for trade to fully return to normal and restore turnover to the level reached prior to the loss occurring.
12 Months is often considered to be the default period within which time the business will be back to the same trading position it enjoyed prior to the loss/damage occurring. However this is not always the case and it should not be taken as adequate without serious consideration being given to all the factors that would affect the recovery period.
Whilst not exhaustive, the following should be considered when selecting the period that is adequate for your business, all of which may have an impact on the time recovery will take:
- Forensic investigations by insurers and local authorities
- Delays in gaining access to the site
- Demolition of remaining existing structures/ buildings and site clearance
- Re-design, preparation of plans and time taken for approval by relevant authorities
- Tenders for rebuilding and awarding of contracts and the re-building itself
- Landlord disputes
- Seasonal fluctuations in the business
- Re-capture of lost business
- Contents/Machinery replacement lead in times
- Additional time needed to comply with specific building requirements of National Heritage or a similar body
A worst case scenario should always be considered when selecting the indemnity period and we would therefore suggest that a 12 month indemnity period would not be adequate for most businesses.
In addition it is also important to ensure that the Sums Insured used by the underwriters to formulate your premium and cover are based on the calculations set out in the policy wording. They should also reflect the changes that are estimated to occur during the full indemnity period. This is extremely important if you have selected an indemnity period longer than a single year as it is extremely common for the Estimated Gross Profit for the next 12 months simply to be multiplied by the amount of years covered under the indemnity period. If you are forecasting to grow the business during the indemnity period then this can leave a shortfall between the Sum Insured and the real term expectations of future profits.
When setting the Declared Value you should also remember that an incident may occur on the last day of the current policy which would mean that the actual settlement required would be the projections for 1 year further into the future rather than the current accounting period.
If your policy is on a declaration linked basis then you may have the benefit of a limit representing 133% of the declared amount with no proportionate reduction applying (average). If you are in any doubt about how this operates please contact our office where we will be happy to discuss it further.
Extensions to your Business Interruption policy
It is possible to add extensions to your BI policy, contact us for more information on Denial of access & Public utilities.