Business Interruption - Loss of Profits

Business Interruption Insurance - why it's so important

There is much more to protecting the investment that your business is to you than simply insuring the physical assets of the business. The owners, shareholders, and/or those that have provided investment finance expect an income stream that will cover the financing costs, the costs of operating the business and an acceptable level of net profit to reward them for the business risk that they have taken, their entrepreneurial skill, a return on their assets, etc.

The net profit and ongoing expenses including, payroll, management and other staff bonuses and financing costs are all regarded as insurable Gross Income or Gross Profit depending on the policy, but whatever it is called, these expenses should be insured. Without it your business may simply go down the plug hole in the event of a loss.

The cover explained

In simplest terms the business interruption policy is designed to put the business back in the same financial position it would have enjoyed but for the loss. It has a carefully thought out formula, that is well tested to achieve this stated aim of putting the business back where it ought to have been financially.

The cover starts from the date of the loss and extends to when the business's turnover and profit levels are back to where they would have been but for the loss. There is a cap set on this known as the Indemnity Period, which is chosen by the Insured when the cover is taken out and is recorded in months on the Policy Schedule.

The trigger for a claim is damage to insured property caused by an insured peril. Cover however can be extended to cover disruption from a number of sources upon which the business is dependent such as public utilities, customer's and supplier's premises, prevention of access, closure by public authority, murder and suicide, and the like. Note covers do vary greatly and you need to ensure that the coverage you have meets your needs.

The past performance of the business is measured for levels of turnover and insured gross profit and these are adjusted as part of the estimation process to determine what level of turnover and insurable gross profit would have been generated but for the loss. The adjustments made are to take into account the trend of the business and any special circumstances that would have affected the business had the loss not occurred. From this estimate of the turnover that would have been earned but for the loss, is deducted any turnover that was actually generated. This determines the shortfall in turnover.

 Additions and subtractions are made to the shortfall in turnover to take account of any savings in expenses the business has made and any additional costs that have been incurred in running the business during the period of disruption that normally are not normally covered.

Additional Increase in Cost of Working Cover Option

Additional Increase in Cost of Working only cover. This cover has been developed for a business which has determined that they will not lose any revenue as such following any type of insured loss, but will incur increase costs to continue to operate. This may include relocation costs, overtime to staff, redirecting phones, internet, etc and advertising to customers of the change of address. While there is definitely a place for this cover it often is found lacking when the crunch comes. It is not recommended for use by manufacturers, retailers or in place of loss of rent cover.

Claims Preparation Cost - Professional Fees

Cover for fees to engage an expert on your side to help manage the loss and prepare your insurance claim is available and recommended to assist with the best outcome for business interruption claim.

* Article is courtesy of Dr Allan Manning - LMI Consulting Group