We often get asked who should buy business interruption insurance, so here are some tips on who should buy and what covers are available.
Business Interruption (BI) insurance was developed to reimburse the financial loss a business suffers following an event that interferes with the ability of a business to trade. All businesses should assess the risk to their financial resilience of a BI event and from this decide how best to protect themselves.
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Under the vast majority of BI Insurance policies, there must be some damage to property owned or used by you in the course of you business to trigger coverage. This is called the ‘Material Damage Proviso’
However, insurance is not always the only answer. Purely relying on an insurer to reimburse loss of income will not sustain your customer base or marketplace. So your business should start by looking at resilience through a business continuity plan. This will assist you to identify the risks and reduce the need for large BI insurance limits at great premium expense.
Types of Business Interruption Insurance
Gross Profit BI insurance reimburses the lost of profits and fixed business expenses (such as wageroll, rent and utility bills.) Variable costs such as cost of manufacture and fuel are not reimbursed because once a business ceases trading these are not incurred. This cover is suitable for manufacturers and other businesses who use raw materials to produce a product.
Gross revenue BI insurance covers service providers such as solicitors or accountants where no raw materials are used and variable costs are minimal.
Loss of net profit BI covers are a limited form of cover which might be considered for larger multi-location corporate buyers to save costs.
Reimbursement of Increased costs of working is a special cover which allows a fixed sum of funds to be used to complete work that will earn turnover. For example employing overtime workers to catch up on an order following an interruption. The basic rule is that Insurers will only allow expenditure of up to £1 to save £1 of turnover, this is called the economic limit. This type of cover can be used in isolation by businesses who have no reliance on a fixed premises to continue working. For example tradesmen or contractors.
There are many other specialised policies covering the likes of Advanced loss of profits, contingent risks and interruption caused by external factors.
Business Interruption Insurance Indemnity Periods
This is the length of time for which your insurer will reimburse your losses. Most business owners choose a default length of 12 months indemnity period in the belief they must be able to get up and running within a year. However, many factors can affect this timescale, especially where you use specialist machinery which cannot be easily replaced or where local council planning delays affect building reinstatement. It is important to use your business continuity plan to assess the maximum stoppage period required.
In Summary
All businesses should conduct a business continuity plan to assess their risks, identify any critical process or resources and the maximum indemnity period required.
Business Interruption Insurance is a complex product to protect a complex risk. Ask your broker for advice on the type of policy you require, which in most cases would be one of Gross Profit, Gross Revenue or just an increased costs of working cover.
If you would like to find out more about Business Interruption Insurance do not hesitate to email us at insurance@butlerevans.co.uk or call us on 0845 4310 448