A Guide to Business Interruption
In business, continuity is the baseline of success. It goes without saying really, continuous revenue and cash flow without interruption is the lifeblood of SMEs.
Ensuring a business has the correct insurance to continue to trade irrespective of internal and external factors, is absolutely key to that business’s success, regardless of size.
While this isn’t news to most business owners, there can sometimes be a gap in understanding the options available for the worst case scenario of when a company is forced to close operations for an extended period. Business Interruption insurance deals with the continuity of income after insured property is damaged or lost after a catastrophic event.
It operates to cover business cash flow and in the process also protects the owner’s income stream and their investment in the business. The cover pays for ongoing costs that continue regardless of whether the business is closed or substantially affected; e.g. rent and utilities. It also covers additional costs incurred to minimise the effects of the closure or downturn, plus net profit and/or loss. In most cases, claims are triggered by weather or fire events.
Protecting your business priorities
Risks can range from increased frequency and severity of existing risks, such as climate change impacts on storms, water levels, bushfire risk; to new risks that develop through advances to technology and social or political changes, including terrorism, regulatory changes, pollution and other environmental impacts or food supply.
However, the risks faced by a business will vary based on the company, it’s critical operations, the risk management options available and a business owner’s risk appetite.
“Business owners should be mindful not to underestimate the length of time it could take for the company to be back to full operating capacity.”
In terms of purchasing Business Interruption cover, the business owner has three concurrently operating areas of interest:
- paying ongoing business expenses to ensure the business is not wound up, and to protect the capital already invested into that venture
- meeting personal guarantees given in connection with the business, and
- maintaining personal income
Consider indirect risks to your business
Business owners can often overlook risks that could indirectly impact their company, so it’s important to take this into consideration too.
Indirect business impacts refer to events affecting property other than the insured’s own. That includes damage to the premises of customers or suppliers, providers of public utilities, access issues due to damage to adjacent premises, or to roads, bridges or railways.
Given the potential ripple effect of damage an event such as public utilities breaking down could cause means almost every type of business can be affected.
The indemnity period explained
The indemnity period is the amount of time during which a business owner can claim the benefits of their Business Interruption insurance policy. It is typically the most important part of arranging the policy because the period decided will determine the total loss of interruption.
Business owners should be mindful not to underestimate the length of time it could take for the company to be back to full operating capacity.
The first consideration is the expected re- building period, but this will vary depending on the structure and there can be delays between the date of damage and the date when all necessary approvals have been received to start reconstruction.
There may be a considerable delay associated in moving back into premises, getting new supplies and attracting a new customer base.
Cover does not automatically cease when the building, or other damaged property, has been repaired or replaced. It will continue, subject to the indemnity period selected, until the results of the business are no longer adversely affected.
The period required will depend on the circumstances of each business but because maintenance of income is a primary consideration to owners and employees, the period selected should not be so short as to create a risk of business failure through shortage of cash-flow in the final stages of the recovery process.
It’s useful to also consider any lease requirements if the business operator is a tenant, in terms of liability for rent and other outgoings.
Article written from opinion taken from one of our Partner Insurers, QBE Europe.
As business insurance specialists, TL Dallas can arrange the policies that best meet your business needs. Please contact your local TL Dallas Business Insurance Team for further details.
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