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What is Business Interruption Insurance?
Business interruption insurance is cover for bills, such as wages, rent or mortgage of the business, which continue even if the business can’t trade.
Following a major loss, such as a fire at the building or storm damage to the roof, businesses are prevented from trading for weeks or even months. New machinery has to be ordered and installed, buildings rebuilt, or replacement stock received from overseas.
So, Business Interruption insurance will pay the shortfall in Net Profit, any additional or increased costs to minimise disruption to the business, as well as fixed overheads, such as wages, utilities etc.
Business interruption insurance starts from the time of the fire until the business is back up and running to where it was (or projected to be) before the fire or other damage occurred.
How much business Interruption cover is needed?
It’s important to work out the maximum time that you need to insure. Getting the business back up and running to pre-loss levels (plus any expected growth) may take weeks or months,
Key factors to consider when choosing the indemnity period (this is the time you get paid by the insurer) include how damaged the business could be, potential loss of long-term customers, market share, property rebuilding times etc.
Additional or Increased Costs of Working are a key part of this insurance cover.
Most businesses spend a lot more money in the short-term trying to minimise the impact on the business. For example, if you own the building and, due to fire damage, you need to lease other premises until it is repaired, the additional cost of rent would be paid, as well as increased shipping costs and warehousing.
A 12 month indemnity period is often a good place to start.
Factors that impact your premium include:
- The type of business or industry, dental practice, timber wholesale or importer;
- Indemnity period: How long do you need the cover for?
- Payroll: Consider how much of your payroll you need to insure and for how long. Insurance companies won’t pay employees to sit at home for 6 months while the business is being rebuilt, so redundancy payments can be insured;
- Suppliers & Customers: do you need to cover specific customers or suppliers that you rely on, without which the business would have difficulty surviving in the short term: and
How Is Business Interruption insurance cover Calculated?
There are two main ways to purchase this type of insurance:
- Weekly income or Sales: usually for smaller businesses, with the industry type and location being the main factors; and
- Annual Gross Profits: this is based on 12 months turnover, less variable expenses, being expenses that won’t continue if the business is operating, such as purchases. This is mainly for wholesalers, importers, manufacturers or property owners (Gross Rentals).
Business Interruption for Services firms
As service firms (i.e. solicitors, investment consultants, and IT consultants) don’t have major fixed plant and machinery or stock to operate, these businesses can usually continue even after their premises are badly damaged or destroyed.
Therefore, the Gross Profits method is generally not insured, only Additional or Increased Costs of Working such as relocation costs, hiring of new IT systems, rental of temporary office space etc. These costs can easily add up to tens of thousands very quickly, even for a smaller firm.