Business...Interrupted

Business Interruption insurance is one of the most misunderstood insurance policies, and often overlooked by business owners, who claim they don’t need it because:
“We aren’t making a profit.”
“Our turnover doesn’t warrant it.”
“It’s too hard to calculate.”

So, what is Business Interruption insurance and what does it cover?

Essentially, Business Interruption insurance protects your business income from specified loss or damage, which could be: direct, for example, damage to your insured premises; or indirect, perhaps a power failure or damage to roads or railways.

How is Business Interruption insurance calculated?

Business Interruption insurance insures your Gross Profit.   Gross Profit is an insurance term which is based on your gross profit plus fixed expenses.  Even if you aren’t making a net profit, you will still benefit — you will still be able to pay your bills.

The important thing to note is that Business Interruption insurance ensures that your basic business expenses are covered under your Gross Profit sum insured; things like:

  • Phone Bills;

  • Electricity Bills;

  • Insurance;

  • Rates.

These are fixed expenses that you pay consistently every month. These bills will continue to arrive whether you are generating income or not. Some expenses may not be as regular as an electricity bill, however. Variable expenses like outward freight, office consumables or bad debts are not usually insurable, since in all likelihood they will not occur while your business isn’t generating income.

Staff

Your staff are assets and key to the smooth running of your business.  Business Interruption insurance allows you to treat your staff payroll as an insurable asset, just as you would a building or plant.  You can insure the payroll as a fixed expense in your gross profit, allowing you to continue to pay your staff while you work through your loss.  Claims for payroll are on an incurred basis, that is, as you pay your staff. If your business is suspended for a long period of time, it is expected that you won’t retain all your staff. In which case, insurers will require you to minimise the effects of closure or downturn of the business.

Additional Increased Costs of Working

Additional Increased Costs of Working are expenses over and above your normal expenses and are incurred to minimise the impact on your business.  For example, to continue trading, you may have to move premises and need new signage; and you may also need to advertise to let your customers know your new business location.

Calculating Business Interruption claims

It’s true: Business Interruption claims are complicated.  Thankfully, all Business Interruption policies have a section for claim preparation costs, which allows for a suitably qualified person to work through your loss and calculate your claim.  This will leave you free to focus on getting your business back on its feet. 

The “indemnity period”

The indemnity period is the time you are covered to get your business back up and running. You need to be realistic when you choose this time frame.  Selecting a shorter time frame to save on premium may not pay off in the long run. 

Indemnity periods are very much dependent on your business.  Plan for a worst-case scenario; for example, if there is a large earthquake with widespread loss, you may need to compete for scarce resources to repair your damage.  The time you need to get back up and running may surprise you.

How Aon can help

Aon’s team of highly regarded specialists are experienced in designing Business Interruption solutions for businesses. They will investigate your options and discuss what you might do in a claim situation, this is used in designing the solution best suited to you and your business.

They have successfully managed many Business Interruption claims over the years; they understand the policy; have built strong relationships with insurers; and most importantly they understand your business and how it works.  They will calculate your loss to ensure your entitlement under the policy. 

Don’t leave it until it’s too late to find out you should’ve paid more attention when calculating your sums insured, or that your indemnity period is not long enough.

Authors

Jules Harris│ Aon New Zealand, Risk Accounting │ jules.harris@aon.com
Jill Comley-Forbes│ Aon New Zealand │ jill.comley-forbes@aon.com