What is Business Interruption Insurance?
Business Interruption (BI) insurance is designed to cover the main financial losses a business incurs when it cannot trade due to a major loss, such as a fire at the building.
It’s best to talk to your insurance advisor and use a BI calculator to ensure the declared values are correct and avoid potential shortfall in the event of a claim.
- Key Purpose of BI insurance
Net Profit – pays the short fall in Net Profit that would have been earned had the damage not occurred; and
Fixed overheads – pays ongoing expenses such as wages, utilities etc, bills that are still payable even if the business is not operating.
Also can pay Increased Costs (ICW) or Additional Costs (AICW) increased or new costs of operating to reduce the impact to the business from the damage.
This could include leasing other premises until it is repaired, the additional cost of rent, as well as increased shipping costs or warehousing.
- Indemnity Period: How Long is Coverage Needed?
The “indemnity period” is “the time the client gets paid by the insurer.
BI insurance typically starts from the time of the fire or loss, paying the client until the business is back up and running to where it was (or projected to be) before the fire or other damage occurred.
It’s crucial to estimate the maximum time required to return the business to pre-loss levels, including any expected growth. This depends on the time taken to get rebuilding permits, move to a new location, rebuild etc & rebuild the business turnover or revenue.
Key factors to consider when choosing the indemnity period include:
• Severity of potential damage.
• Potential loss of long-term customers and market share.
• Property rebuilding times.
While 12 month’s indemnity period is often a good place to start, businesses can choose longer periods (e.g. 18 months). The chosen indemnity period directly impacts the premium.
Note: It’s important to declare the full 12 months of gross revenue/turnover even if a shorter indemnity period is required, as the underwriter will apply a premium discount rather than underinsuring the sum.
- How is Business Interruption Cover Calculated?
Annual Gross Profits:
This method is based on 12 months turnover/ revenue (or Gross Rentals for a property owner), less variable expenses, being expenses that don’t continue if the business is operating, such as purchases or discounts.
Three-step process for Annual Gross Profits:
STEP 1: Calculate the Insurance Declared Value for Gross Turnover or Revenue. This involves estimating turnover for the current year and adding an estimated percentage change to reflect business trends over the next 12 months.
STEP 2: Deduct Uninsured Working Expenses that are Not to be Insured. These are expenses that won’t be incurred, if the business is not able to operate, such as purchases (stock, consumables), cost of services, utilities (can be insured at say 50% ), freight, bad debts, and payments to sub-contractors
STEP 3: Wages for large Employers – Consider Dual Wages & Payroll cover (Optional). This step is only done if not insuring full wages and payroll. It involves calculating 100% wage cover for an initial period (e.g., 13 weeks minimum) and a reduced percentage (e.g. 30%) for the remainder of the indemnity period.
For employers with a small workforce, where everyone would be kept onto assist to rebuild the business – Full wages cover should be chosen.
Declared Values
The Estimated Turnover less Uninsured Working Expenses is the Declared Gross Profits for the BI insurance.
As mentioned above, additional Items that can be included in the sum insured including – Wages in Lieu of Notice, Increased Costs of Working, Additional Costs of Working, and Claims Preparation Costs.
- Specific Considerations for Service Firms
For service firms (e.g. solicitors, IT consultants), which typically don’t have major fixed plant and machinery or stock to operate, the Gross Profits method is generally not insured. Instead, coverage focuses on “Additional or Increased Costs of Working” such as relocation costs, hire 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.
- Extensions of Cover
Several extensions of cover can be added to the policy, including:
• Murder, suicide and infectious disease etc.
• Other premises and property: Covers income loss due to damage at premises of “Unspecified suppliers,” “Unspecified customers,” “Documents,” “Storage sites,” “Transit,” “Roads, bridges and railway lines,” and “Computer data”.
• Prevention of access by a public authority.
• Public utilities.
• Additional claims preparation costs.
• Loss of attraction – drawcard premises.
These extensions allow businesses to tailor their BI coverage to their specific risks and operational dependencies.
To learn more about tailoring the BI coverage for your business, contact Lewis Insurance Services on 07 3217 9015 or send us an email by clicking here.
This article was published by our AFSL Licensee, Insurance Advisernet Australia P/L, www.insuranceadviser.net
Disclaimer:
This information and any accompanying material does not consider your personal circumstances as it is of a general nature only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances and considering the Product Disclosure Statement