Business Interruption Insurance – Why do You Need it?

Could your business survive after a fire?

Imagine receiving a phone call in the middle of the night and being told that the building containing your business is on fire. Fortunately no one was in the building, but it is badly damaged. It will take at least ten months to re-build to be able to move back in and re-operate the business. Yes, you can claim to replace the Contents or if applicable, the Stock under the Fire Section. You may also own the building and that can be reinstated.

However, could you afford to lose not only ten months of revenues, but also the period in re-establishing the business back to the same level as it was before the fire? Bills continue to come in. You do not want to sack your staff as they will be difficult to replace when the business is re-establishing and they have been very loyal to you. Perhaps you could afford the expense of relocating to temporary premises? But would one be readily available? Is there one nearby? What would it cost to let your customers know where you are now located?

The Insurance Council of Australia estimates 50% of small to medium businesses cease operating within three years without this cover or enough cover. But with an appropriate level of business interruption insurance, you would be able to manage this loss and maintain the profitability of your business.

What is business interruption insurance?

It is not just a fire that can cause interruption to your business. It could be Storm or other damage you have cover for. Perhaps the neighbouring building has had the fire or a crime has occurred and you cannot get access to your business for a while. If you have lost access or availability, you would lose the ability to make money. In this scenario, business interruption insurance is essential. It protects the income stream to your company. The shortfall in your Gross Profit is covered by Business interruption insurance (also known as consequential loss or loss of profits insurance) and has the following four main components:

1. Business Interruption (BI) cover: Replaces the lost gross earnings (profit) during the shut-down resulting from a covered property loss. The cover can also continue to pay your workforce while you have no work for them. Though some Insureds choose to exclude payroll (which reduces the premium), we recommend including it as it prevents losing your trained employees or losing them to other jobs while waiting for your business to recover. Or at the very least, tailor it to suit your business needs.
2. Additional cost of Working: Covers the cost to relocate to another address and continue operations. During relocation, businesses typically incur the extra expenses of rent, equipment lease and the cost of advertising. Also modifications or a fit out may be needed. All of which is covered by this section of the policy.
3. Claims Preparation Costs: This coverage is optional, but is recommended in the circumstances where you need to hire an accountant or other professional to help prove your loss.
4. Indemnity Period: This is how long you will continue to be paid from the date of loss. It needs to factor in not only the time to actually rebuild or repair machinery or replenish stock, but also building and repair delays because of limited availability of building supplies and contractors to perform the work, particularly after a major catastrophe. There can also be delays in obtaining Council approval or permits. Most Insureds choose only a 12 month indemnity period but that may not be enough.

Cover for damage to other people’s premises

While there may be Business Interruption cover during the time your landlord’s premises are being repaired or reinstated, you can also extend the policy to allow for your key customers or suppliers sustaining material damage and subsequently having a consequence on your business. This includes damage to public utilities or if unable to access your premises due to government authority closure.

Who should have business interruption coverage?

Any business that has a physical situation with contents, equipment, tools or information that are essential for transacting business should have this protection. It is critically important for manufacturing, processing, retail and wholesale businesses. If damage occurs to your physical location, this results in the interruption of business and would interfere with your ability to generate revenue.

The most ignored section of a Business Package and possibly the most misunderstood is business interruption insurance. Yet it could be the most important.

How does it work?

BI insurance or business interruption insurance is triggered by a covered material damage claim. Typically, a business interruption insurance policy replaces any lost gross profit while the material damage is being repaired or reinstated. It also covers the extra expenses related to keeping the business operating during a business interruption. If payroll is included with the gross profit your employees continue to get paid even if they’re not working.

To maintain maximum protection, it is best to complete a business income insurance calculation every year so you know how much coverage you need as your business grows. Determining the appropriate limit is challenging as you should look at what loss you might make if the material damage occurred on the last day of the policy for the ensuring 12 months and beyond. Make sure you consult with a business interruption expert.

We ensure that you get the best business interruption insurance protection at the best possible price

If you need business interruption insurance, or if you just want to learn more about this cover, CPR Insurance Services can help. We have helped many businesses keep going during difficult moments when a loss happens

• We make a point of understanding your business and assist you in calculating your gross profit and sum insured.
• We help you understand your business interruption potential with appropriate analysis.

Call CPR – Experts who will save you

Cooper Professional Risks Pty Ltd trading as CPR Insurance Services is an Authorised Representative of National Adviser Services Pty Ltd (ABN: 60 096 916 184) trading as NAS Insurance Brokers (AFS No.233750)

Switzer on Business Interruption

Why take Business Interruption cover? – Video