Business Interruption Insurance

If disaster strikes your Material Damage cover on equipment and stock will enable you to repair or replace the damaged property but what would happen to your business in the meantime?

Serious damage will almost certainly mean that your cash flow is interrupted or reduced - it will take time for the business to get back to normal. Customers may be lost, employees laid off and you will still have to meet your other obligations - (rates, interest and so on).

This is  where Business Interruption insurance - also known as Loss of Profits or Consequential Loss - comes into its own. It can, quite simply, prevent the collapse of the business.

It compensates for the shortfall in income by means of:

• Helping to pay the bills to maintain the business
• Paying towards the salaries and wages for employees that remain, although not fully productive
• Funding the cost of notice and redundancy payments to employees who have to be dismissed or laid off
• Paying for extra costs involved in maintaining the business, including the use of alternative facilities or premises
• Restoring the net profit

Your sum insured or limit of indemnity is usually specified in the policy - it is the maximum amount the insurer will pay in the event of a claim. This limit is determined at the outset, based on your own estimate of forthcoming gross profit or income, making allowance for the trends and developments of the business. It is essential that the limit is set at an adequate level to provide full protection whilst your turnover is affected. Claim payments might be scaled down if you are under - insured.

The other primary consideration is the length of the indemnity period you opt for - this is the period from the date of the damage during which the policy provides compensation.  For example if specialist re-building or re-equipping were to be needed your trade is likely to be affected for a longer time and an indemnity period of 24 or 36 or longer maybe more appropriate. 

Some package policies, such as those for retailers and other small businesses incorporate standard limits for gross profit or income . The adequacy of such limits should still be carefully considered.

Insurance is available to cover the risk of Business Interruption as a result of fire, lightning, explosion and the usual range of perils such as storm, flood and malicious damage and theft risks.

The insurance enables you to claim in the event of insured damage occuring at your own premises, which could affect turnover.

Extensions to the policy can cater for the effects on your business of such damage happening at the premises of your suppliers, customers or providers of gas, water, electricity and telecommunications. Many other specialist covers are available to cover, for example, the consequences of engineering and computer breakdown.

For retailers and catering businesses the cover can extend to include closure following an outbreak of a notifiable disease, food poisoning, murder or suicide or the discovery of pests or defective sanitation at the premises.

Some insurers will also cover your financial loss resulting from bomb scares, oil or chemical pollution of nearby coast or waterways, or loss following damage at a local attraction such as a shopping complex or leisure centre.

The process of measuring the extent of a Business Interruption loss, is usually a complex one and it may be some time before the full settlement figure can be quantified.

In the meantime, the insurer is able to make payments on account, keeping the wolf from your door.

It is important to make sure that this cover is arranged properly - it can be the difference in your company continuing to trade after serious damage.