Preparing for the future is essential for your business to succeed and grow. Risk management is an essential part of your planning, and that’s where business interruption insurance comes in. If you don’t have the luxury of employing a risk management expert, business interruption insurance can seem a little overwhelming at first.
That’s why we’ve prepared this guide to help you understand what business interruption insurance is and why you need it.
1) What is business interruption insurance?
Business interruption insurance is also known as loss of profits insurance. It takes care of the financial losses associated with material losses to your business.
For example, if your office suffers a fire, you’ll claim for the repair of the building and replacement of lost contents through your commercial property and contents policy. But what if your business can’t trade while your office is being repaired? Business interruption insurance covers the lost income incurred while you can’t operate. You can also use it to cover the extra costs you might face to keep your business running, for example, renting temporary equipment and premises. It will also pay out the costs of any accountancy fees that are incurred to prepare your claim.
Take action
- You should speak to your insurance broker to find out if business interruption insurance is included as standard in your commercial insurance package.
- If it is, get the details of the level of cover provided.
- Read on to find out if you have the right level of cover and if you can save your business some cash.
2) What organisations need business interruption insurance?
Getting back to business as usual as quickly as possible after something goes wrong is essential for the survival of almost every business. That’s why business interruption insurance is a key part of your business risk planning. With it, you can rest assured that suppliers and staff can still be paid.
Take action
- To decide if your business needs business interruption insurance, take a look through your risk management plan.
- Use this plan to identify which risks will need to be covered.
- If you don’t already have a risk management plan, use this free template to develop one.
3) How to choose cover to suit your budget
Like all insurance, business interruption insurance can be tailored to cover a wide range of business needs and risks. So how do you know what is right for your company? We outline what is covered by the three most popular loss of profit policies: ‘All Risks’, ‘Fire and Special Perils’ and ‘Engineering’.
All Risks
This ‘all-in’ cover will provide a payout for all types of loss, destruction of, or damage unless the cause is something specifically excluded from the policy. (Please see below for common exclusions.) It gives you the greatest level of peace of mind, but will generally be more expensive than if you insure only specified risks.
Fire and Special Perils
Many businesses looking to strike a balance between costs and benefits opt for Fire and Special perils cover. This pays out on loss of profit if a fire affects your business. This includes lightning damage and gas explosions relating to boilers or domestic equipment. There are a number of other ‘Special’ perils that can also be added. These include natural disasters like earthquakes, storms, and floods, as well as things like riot, malicious damage, and escape of water.
Engineering
Engineering perils are also commonly insured. This can include being unable to operate your business because of a public utility supply failure, such as water or electricity.
Take action
- If you don’t have an in-house expert, make the most of the free advice provided by an insurance broker.
- They’ll work with you, explaining the different levels of cover available and giving you the information you need to make a decision.
Bear in mind that you’ll need equivalent material damage insurance or your business interruption costs won’t be covered. For example, you’ll need to cover your equipment, in your premises against material loss in the case of a fire, or your business interruption insurance won’t be triggered. This is because it can be assumed that the business will get back to trading as normal faster if there is insurance in place to repair or replace damaged items.
4) What common exclusions to business interruption insurance should you look out for?
Business interruption insurance won’t automatically cover you for everything that can go wrong. Different policies can specify different exclusions, but these commonly include:
- Terrorism (unless you specify this and pay extra)
- Riot and civil unrest (as above)
- Nuclear and radioactive explosions
- Pollution or contamination
- War
Take action
- You should talk to your insurance broker to ensure they fully understand the nature of your business and the risks you face.
- Your broker will ensure that each aspect is covered appropriately by business interruption insurance.
- If you need terrorism cover or another excluded risk, you can usually pay to make sure this is included.
- Cybercrime is increasingly affecting businesses and can force a virtual shut down. Speak to your broker if you would like cyber-attacks included in your business interruption insurance.
5) Check set limits meet your business needs
There are two important caps on your cover that you’ll need to check out before you accept a quote.
- The first is the indemnity period. This is the length of time that your business losses will be covered. Make sure this is sufficient for your business. For example, if you use machines that can only be sourced with a six-month lead time, you’ll need at least that length of time to cover you in the case that your machines are destroyed.
- The second is gross profit. This is the maximum amount of profit that you will be able to claim back.
Take action
- The lower both of these caps are, the lower your premium will be.
- Take care not to underestimate these values or it could leave your cash flow in trouble in the future.
- It’s also worth bearing in mind that if you claim for any increased costs of working (for example renting a temporary property) this will only be permitted if the associated costs are lower than gross profit upper cap.
6) How to calculate how much gross profit your business interruption insurance should cover
It can be easy to miscalculate the amount of gross profit that you’ll need to cover to protect your business. You need to identify your fixed costs such as rent or salaries, which will still need to be paid even if you cannot trade. Add to this your net profit, which the amount that you are likely to lose through being unable to trade.
Don’t just use your turnover figure, because that includes both fixed costs and variable costs. The variable costs are those that change depending on turnover, such as materials. But you’re your spend will reduce if you are not producing anything.
For example, if you run a factory and it cannot operate, you will not need to cover the cost of raw materials, as you will not be making anything.
The easiest way to make this calculation is to simply deduct the variable costs from your anticipated gross turnover for the coming year.
Take action
- You can’t just pluck a figure from thin air. Your insurer will want to look at your business’ average recent turnover, so you’ll need to make sure all your financial records are kept up to date.
7) How to source business interruption insurance at the right price
The amount you’ll pay for business interruption insurance will vary depending on your business type. For example, a restaurant is likely to pay more for cover than an accounting firm because the nature of the business put a restaurant at greater risk of fire. Your location can also have a bearing. For example, if you are situated close to a river, your premises may be at greater risk of flooding.
Take action
- First, before you take out business interruption insurance, double check to see if you’re already covered.
- Some commercial insurance policies may automatically include business interruption cover. Speak to your insurance broker to find out if it is included in your business cover.
- Make sure the amounts insured are sufficient to meet your business needs. If it’s not included or enough, your broker can explain your options for a separate stand-alone policy or to combine it within your commercial insurance package.
- Use an independent insurance broker with experience dealing with business interruption insurance. Your broker can help you with advice on the level of cover you need. If you opt for an independent broker, they will not be tied to a single insurance company. Instead, they will use their contacts across the industry to identify and negotiate the best deals available for you. Like ordinary domestic insurance, shopping around in this way really can generate significant cost savings.
8) Additional ways to tailor your policy to save you money
Some businesses can save money on business interruption insurance by restricted the level of cover they take out. For example:
- The increased cost of working cover only. This level of cover may be suitable if your business income is unlikely to be badly affected by physical damage to premises. For example, an office-based business may only need to cover the increased costs of renting a temporary office space. It can continue trading, so no extra cash would be needed to cover lost income during this period.
Take action
- Speak to your insurance broker to find out more about the cost savings of restricting cover.
- Finally, consider carefully whether this is the right option for your business. Bear in mind that a few pounds saved now could prove ruinous if you are left short in the future.
9) Other insurance for business success
Depending on the type of company you operate, you’ll need to pick from a range of other essential business insurance options.
These include:
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Fire, vandalism, and other damage to premises
Commercial property insurance covers the material damage or loss to the building or buildings that you use for your business.
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Loss or damage of equipment/stock
Whether you run a hairdressing salon or a factory containing multi-million-pound robots, your equipment and stock are likely to be your business’ biggest assets after premises and staff. Make sure it is covered so if it is damaged or stolen you can replace it immediately and get back to work.
After your actual premises and staff, the equipment you use could be considered the most integral element of your business. Therefore you should make sure that you are properly insured for its full value. That means if it is damaged or stolen you can replace it immediately and get straight back to work.
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Public liability insurance
This covers your business for claims of injury or damage to property brought against you by a member of the public. This can include suppliers or other visitors to your business premises. It covers things like slips and trips as well as allergic reactions to mislabeled food.
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Employer’s liability insurance
This covers the same risks as above, but for your employees. It’s a legal requirement if you employ any members of staff, even if they work part-time or are a member of your family.
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Commercial vehicle insurance
If you have a van or run a fleet of vehicles for your business, you’ll need specialist commercial cover.
Take action
- Regularly review your insurance as values can change. This is particularly important with equipment and stock cover, as failing to insure these adequately could leave your business without the cash to replace them.
Conclusion
Business owners can buy substantial peace of mind with loss of profits insurance. It protects your cash flow ensuring your business survives, whatever goes wrong. And although it may seem complicated at first, it’s worth spending a few minutes to get to grips with it. That’s because loss of profits insurance supports your risk management plan. If a disaster does happen, it can keep your business afloat.
You don’t need to employ a risk management expert. Instead, find an experienced insurance broker to make the most of the knowledge they can share. An hour or so spent sorting out your business interruption insurance will reassure you that your business can weather any disaster in the future. And that’s great news for you and your team. So what are you waiting for?