If you find business interruption cover confusing, here's a straight-talking rundown of everything you need to know.
So, what is it exactly?
Business interruption insurance (also known as "loss of profits" or "loss of gross revenue") is a type of insurance that covers the loss of income a business can suffer after an incident. It provides cover for any period when a business cannot trade as normal because of an event resulting in damage to property on their premises. Business interruption (BI) cover differs from property insurance in that a property insurance policy only covers the physical damage to the business. The additional cover provided by the BI policy covers the potential profits that would have been earned.
The devastation to property following a major incident, such as the Buncefield oil depot disaster in 2005* for example, is serious enough. However, the loss of property is often nothing compared to the loss of income that ensues as a consequence of that loss. BI insurance was created to help insured parties regain their predicted pre-loss trading position.
How does it work?
BI insurance will pay an amount to cover the shortfall in profit (before tax is taken off), and also pays any increased costs of running the business as a result of the event; for example, the extra accountancy fees you have to pay. The complexity with BI claims arises from the assessment of what the loss actually is" which is why good financial records, showing how the business has performed in the past, are such an important source of information.
Claims settlements have to take into account business trends (either positive or negative), any savings that can be made (for instance, no longer paying rent under a cessor of rent clause in a lease), and even staff redundancy payments" hence the need to appoint forensic adjusters when investigating such claims.
It is vitally important to get the level of cover required correct" including taking future business trends into account. And while ‘package’ market insurers have sought to overcome this by offering fixed levels of cover, these could easily be inadequate. Therefore, it is vital that the correct questions regarding the adequacy of the cover requested are asked at inception and at every subsequent renewal.
Very crudely, in a retail environment, the amount of business interruption cover needed is found by considering the annual turnover of the business and deducting the annual cost of goods sold. When talking to a client this can be broken down to monthly or even weekly takings from which the cost of the goods sold during that period can be deducted.
For more information on the subject of business interruption insurance, the ABI provides some useful insight. Please click the button below:
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