Business Interruption is an intricate and important insurance cover that acts as an essential lifeline for organisations as they work to get operations back on track following an insured property loss. Sadly, it’s also a common area of confusion and without careful consideration it’s easy to end up with insufficient cover.
Building on our last article about property underinsurance, this piece looks at some of the key things to consider when it comes to business interruption cover.
There are three types of business interruption cover – loss of gross profit, loss of gross revenue and increased cost of working.
Loss of gross profit cover will pay for the loss of gross profit suffered by your organisation as a result of the property loss. It’s important to realise that the accounting and insurance definitions of gross profit are different. For example, salary costs aren’t included in the accounting definition, but are in the insurance definition.
Understanding these differences will help you set insurance cover at the appropriate level, but as this is a highly specialised area, seeking impartial expert advice is always a good idea.
It’s also important to remember that some of your ongoing expenses will decrease following a property loss and we obviously don’t recommend you buying insurance for costs that you’re not going to have. These are called uninsured working expenses and include things such as bad debts; purchases for materials and services (including utilities); and outgoings for packaging, transit and freight.
Correctly identifying and quantifying your uninsured working expenses plays a huge part in calculating the correct sum insured for your loss of gross profit business interruption cover.
But if you don’t have many costs that’ll decrease in proportion to your profit in the event of an insured property loss, it may be more appropriate to opt for loss of gross revenue business interruption cover.
Policies written on this basis provide cover for the reduction in your turnover, as a result ofthe property loss. It’s generally less complicated to provide accurate, pre and post loss figures for turnover. This makes it easier to calculate the drop to which insurance applies.
Loss of gross profit and loss of gross revenue policies tend to include a limited amount of cover for increased cost of working. This lets you pay for measures that’ll reduce the overall cost of the loss. But remember, insurers will only approve of you spending £1 if it results in a saving of more than £1.
While some amount of increased cost of working cover is generally included in loss of gross profit and loss of gross revenue policies, it’s also possible to buy business interruption cover purely on the basis.
This approach is often attractive to organisations whose gross profit or gross revenue wouldn’t be significantly impacted by an insured property loss, and who want the cover to protect their immediate cash-flow while implementing measures to mitigate their loss.
In addition to choosing the most appropriate type of business interruption cover and calculating an accurate sum insured, significant thought is needed around your policy’s indemnity period. The indemnity period starts on the date of the insured property loss and is the length of time for which your insurer will provide cover – typically 12, 24 or 36 months. Again, this is where a specialist independent broker like Keegan & Pennykid can help.
Something else that we notice is that many organisations underestimate how long it’ll take them to recover from an insured property loss and find their insurance payments end while they still need them. As an example, if you occupy a listed building, securing the requisite permissions and tradespeople to complete the necessary repairs can often take a long time.
Similarly, lead times on replacement plant and machinery might take a lot longer than you think. These delays can quickly eat into your indemnity period, leaving little time to get back to pre-loss productivity levels.
If you’re a tenant, the landlord may be slow in handling the property claim or find themselves in dispute with the insurer. Either way, this impacts on your ability to get operations back to normal within your indemnity period. And once your indemnity period ends, so do payments from your business interruption policy.
Exceptional peaks or troughs in recent years of trading may mean figures from these years are not an accurate guide to your future revenue streams. This needs to be factored into your calculations. If not, your business interruption cover won’t accurately reflect the commercial performance of your organisation or pay out accordingly.
It’s worth remembering that it may not be property damage at your own premises that stops you from operating. A fire at a neighbouring building or a flood in the local area may not impact your building directly, but they could prevent you from gaining access to your premises and physically trading. Knowing what non-damage business interruption cover your policy provides against such events is something to consider.
Some aspects of insurance are black and white and tend to be well-understood by seasoned insurance brokers and buyers. But business interruption is a detailed and technical area of cover that needs specialist expertise.
If you’ve got a specific query or want to discuss your business interruption needs in more detail, then please get in touch with us at Keegan & Pennykid. rather than leaving it to chance.
We’ve been managing Business Interruption for clients for over 55 years, so you could say, we have a little experience in such matters.
