8 October 2024

Business
interruption insurance

By Sean McNamara Branch Manager, Worcester
Illustration of several sailboats docked at a wooden marina, with blue water visible on the left and a white background on the right.

Understanding business interruption insurance

Businesses are unpredictable at the best of times, and when implementing risk management strategies, it can be difficult to plan for every possible scenario. This is where business interruption insurance comes in. Business interruption insurance offers peace of mind for unexpected events, whether it’s a natural disaster, a major fire, or water damage. It can offer protection for some unforeseen events that can force your business to temporarily close or cause major disruption to your operations, significantly impacting your ability to generate revenue. For example, in the event of a fire, property insurance will cover the damage caused to the building, while business interruption insurance will cover the loss of income while the building is closed or under repair. It acts as a welcome financial safety net, ensuring you can still pay your bills and stay afloat in the face of unexpected challenges.

The common pitfalls in business interruption insurance
 

Although business interruption insurance will compensate for lost income and cover identified fixed operating expenses, it’s crucial to carefully evaluate the indemnity period in your policy. The indemnity period is the duration for which your insurer will provide compensation during the downtime. If this period of cover is too short, it may hamper your full recovery, leaving you without revenue when you need it most. Many businesses typically secure cover for only 12 months, often underestimating the actual time needed for recovery after a loss. To ensure adequate protection, we advise our clients to choose a minimum period of 24 months.

It is also important to realise that business interruption insurance will not cover every type of operational disruption and that the insured ‘perils’ (any event, situation, or incident which causes property damage or loss) are often outlined in your policy. For example, many businesses were not covered for the downtime caused by the recent pandemic, and cyber liability which in today’s digital age is a critical standalone product can often be listed as an optional add-on. As with all insurance policies, it is wise to scrutinise your conditions carefully, taking note of the perils and exemptions to ensure that you have the cover you think you will require when things go wrong. Your broker can help highlight areas that are excluded and work with you to understand your business and identify when it may be at risk.

Other extensions that should be considered when arranging your business interruption insurance include major incidents affecting one of your customers or suppliers, outages in your utilities, and being forced to close your premises due to police, government, or military action, such as an act of terrorism or an unexploded World War II bomb. These are all factors that could adversely affect your income.

Lastly, make sure your calculations are correct, and the sum covered is enough to provide for the revenue that you would have earned had the disruption not occurred. To understand a basic calculation of your business insurance indemnity figure, start by determining your gross profit. This is done by subtracting the cost of sales and any uninsured working expenses from your total turnover. Your broker will be able to help with a more in-depth calculation.

To ensure that your business has the correct protection in place, it is always worthwhile discussing your business in detail with an expert. The experts at Haven Knox-Johnston Commercial work with a broad range of marine businesses to identify the risks specific to your business and then help you put together a corresponding package of insurance coverage, including appropriate extensions, to provide complete peace of mind against the financial fallout of unexpected disruptions.

 

Call the team today to arrange your business review.

Call us today on
01905 930 760
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