A recent survey of nearly 500 small businesses found that one in four would not survive if they had to close their doors for three months. The survey found that a quarter of small businesses would have to shut down if they experienced a business disruption such as a major fire or storm. Perhaps the most striking finding was that 1 in 7 businesses did experience a shortfall in income because of a business interruption in the past 12 months.
(CGU Blog, January 14, 2016)
Business Interruption Insurance makes sure that the financial position of your business returns to where it was before the loss. Your insurer will assess your profits and turnover and factor in seasonal variations and trends for an understanding of your potential loss after an insured event.
In order to be eligible for Business Interruption Insurance:
- You need to have a property policy in place
- The damage incurred must be of the type that would be covered under that property policy
Business Interruption Insurance also covers elements that you may not have even thought about. If you have suffered a major interruption to your business, you might also find that you need to spend extra money to get back up and running. For example, there’s the additional rent you might have to pay for temporary premises, or the costs of employing additional staff to assist in the clean-up process.
Business Interruption Insurance can:
- Give you peace of mind. Business Interruption Insurance provides the safety net you and your family need should the unthinkable happen.
- Keep you afloat while you wait for plans to be drawn up or council permits to be approved when rebuilding.
- Cover the costs of finding and fitting new premises as well as advertising costs incurred to let your customers know you have moved and when you’re fully open for business again.
- Ensure you are able to continue to pay and retain key staff while the business gets back on its feet.
- Cover interruption costs to your business such as suppliers not supplying, key customers unable to purchase your goods, or when power or gas outages limit your ability to do business.
While Insurance can be complex, but there are six keys to understanding Business Interruption Insurance cover:
1. It Provides Indemnity Cover with an Indemnity Period
This means that Business Interruption Insurance is designed to put your business back into the same financial position had the damage to your business not occurred. The cover starts from the date of the loss and extends to the time when your profit levels have recovered to pre-loss levels (called the ‘indemnity period’).
2. It Covers for Loss of Gross Profit
Business Interruption Insurance covers you for loss of your Gross Profit during the indemnity period. However, it’s important to remember the definition of Gross Profit under a Business Interruption policy is different to the standard accounting definition of Gross Profit, as this definition can impact the calculation of the amount of lost profits you can claim.
You should carefully consider your gross profit – is your business growing? will revenue and profit grow over time? Is your revenue particularly seasonal? This could affect the calculation of insurance profit.
Does your business have expenses or costs that are fixed and do not vary with sales? In other words, despite covering your gross profit, some expenses may be fixed no matter how much income you earn and you may wish to specifically cover for the amount of these expenses rather than simply cover your business for estimated Gross Profit.
This is a complex area for many business owners and we recommend you seek advice from your insurance broker or accountant.
3. There Must be Damage which Causes a Loss
Business Interruption insurance is designed to respond in the event that there is damage to your business property through an event such as fire, storm or earthquake that is covered under the policy. Business Interruption insurance covers loss in Gross Profit that results from the impact to your trading or operations as a result of these damages to property or assets.
4. Consider Additional Increased Costs of Working
Business Interruption Insurance can also cover additional costs that you may incur in order to get your business up and running after damage. For example, you might need to spend money on additional rent for temporary premises or additional wages for people to assist with the clean-up of your business after a fire or storm.
5. Loss of Rent for Commercial Property Owners
Business Interruption Insurance is also important for Commercial Property Owners. If you have tenants, Business Interruption cover will insure for the loss of rent that you experience if tenants are not able to occupy the premises while the clean-up and repair process is underway. With rent, do not forget to ensure that the outgoings are also insured. If the tenant has the right to temporarily cease paying rent, they will also have the right to cease paying rates, land tax and any other outgoings. If these are not insured as part of loss of rent, then as the landlord you will have to meet the ongoing outgoings yourself.
6. Beware of Underinsurance
Business Interruption cover is subject to underinsurance or co-insurance clauses. This means that if you under insure, even in the event of a partial loss, you may be deemed to be carrying some of the risk yourself and the Insurer will require you to bear a portion of the claim.
Every Business Interruption cover is different. While the principles above are generally true across most policies, you need to research and determine what policy and coverage best suits your needs. It’s a complex area so we suggest that you seek advice from a professional to help point you in the right direction.
Your PSC Connect Authorised Representative can answer any queries you have, or provide you with more information on Business Interruption Insurance.
Conditions apply for each policy and the information expected from you for a policy to trigger. Coverage may differ based on specific clauses in individual policies. Please ask your broker to explain the additional benefits and exclusions pertaining to your policy.
The information provided is general advice only and does not take account of your personal circumstances or needs. Please refer to our financial services guide which contains details of our services and how we are remunerated.