Business Interruption Cover
Business interruption insurance can protect against disturbances that affect your business’s ability to operate normally. This could include disturbances at your own premises or at a nearby one – providing that the event has caused a genuine interruption to your business’s operations.
An interruption could be caused by events such as:
- Severe damage – Where rebuilding or extensive repairs are required
- Major theft – For example, of stock which cannot easily be replaced
- Denial of access – If you cannot physically enter your premises
- Failure of utilities – Your water, gas or electricity supply is unable to reach you
- Customer failure – A major customer is unexpectedly unable to purchase from you
- Food poisoning or infectious disease – Requiring closure for health and safety reasons
- Death – Where a police investigation may be required, such as murder or suicide
- Animal infestation – The likes of vermin and insects.
A study carried out by Zurich Insurance found that, less than 40% of SMEs have business interruption insurance in place. The same study claimed that 23% of the SMEs surveyed responded that they had never even heard of Business Interruption Insurance.
Business interruption insurance is one of the most misunderstood – and therefore often overlooked – business insurance policies.
That’s largely because many business owners mistakenly believe that other insurances such as stand-alone buildings and contents policies will take care of everything if their operations are interrupted by events such as break-ins, floods or fires.
However, while buildings and contents policies will usually put the initial damage right eventually, they make no allowance for the consequential financial losses your business will sustain in what can often be a long term interruption in your trading. In fact, for many businesses without BI cover, an event that starts with business interruption can often lead to a business termination.
What sort of events does business interruption cover help with?
While there are many different causes of business interruption, the two most common are fire and flood. No one ever expects these twin disasters to strike their business, and when they do, they often mistakenly expect other policies to cover all of their losses.
A typical scenario for a flood claim won’t even involve heavy rain and a river that bursts its banks. Chances are that a pipe will burst or a rooftop water tank will collapse, and by the time you arrive in the morning your premises will be under three feet of water.
Well, stock can be replaced, eventually, as can computers. Yet a flooded building will often need at least two months to dry out, and in the case of a severe flood may take more than six months to be habitable again. Specialist machinery can sometimes take just as long to replace. If you cannot operate in the interim, you will lose revenue, possibly run out of money, and probably lose irreplaceable staff as well as valuable customers.
Most businesses would not operate without property insurance, but in the event of serious property damage, it’s not uncommon for the Business Interruption component of a claim to be greater than the cost of repairing the physical property damage.
Costs incurred as a result of interrupted trading can accumulate quickly causing untold damage to a company’s reputation and financial well being. Any SME businesses can benefit from Business Interruption cover.
The Difference Between Business Interruption & Property Insurance
While Property Insurance covers the physical damage to the business, Business Interruption covers the profits that would have been earned if the business were operating as usual. It is designed to put a business in the same financial position that it would have been in if no loss had occurred.
What May Be Covered By Business Interruption Insurance
A Business Interruption Insurance Policy will typically cover the following:
- Profit: The profits that would have been earned during the time that that business is out of action (based on previous months’ income).
- Fixed Costs: Covering the operating expenses and costs that continue to incur even though the business is not operating (based on historical costs).
- Temporary Location: The expenses associated with moving to, and operating from, a temporary location.
- Disruption: Covering the costs associated with disruption caused by service providers including power, telecommunications & water.
- Extra Expenses: Cover for the reimbursement for ‘reasonable expenses’ (beyond the fixed costs) that allow the business to continue to operate while the property is being repaired.