Wondering what to expect when you have an interruption of business - what your policy covers? ….well, you’re in the right place because we’re sure to have the answers for you.
What does business interruption insurance coverage cover?
What triggers a business interruption insurance policy?
What is ‘business income’ in terms of a Business Interruption Policy?
What is extra expense cover?
What if I can operate my business at a temporary location rather than suspend operations?
What if my business is interrupted due to a loss at my supplier? My premises are ok, what happens then?
As a landlord what happens if my building is untenable?
What is the period of restoration?
What is a waiting period?
What is co-insurance?
What is net income?
What are non-continuing expenses?
What is business income loss from dependent properties?
What service does a forensic accountant provide?
What can I expect to happen in the event of a claim?
What will I need to provide the claims examiner to help resolve my claim?
What else can I do to help resolve my claim?
What does business interruption insurance coverage cover?
Business Interruption Insurance is usually taken out as adjunct to a business’s usual material damage insurance cover which protects against ‘insured perils [ie fire, storms earthquakes through to theft & burglary etc’] where as a result the business has to temporarily shut down, the business interruption insurance will usually reimburse the business owner for the necessary continuing business expenses and/or lost net profits – indeed, some policies will even make advance payments.
For instance some businesses only require interruption cover for some necessary basics such as:-
- wages of permanent employees; [including holiday pay or similar entitlements, loading or redundancy termination pay owing to an employee;
- rent, less any rebate;
- leases of trade equipment etc’.
But, business interruption insurance can be tailored to meet a business’s own unique requirements; for example ‘extra expense coverage’ in case you have to carry on business at a different location in the event your usual trading premises; and ‘Loss of Profits’ which is designed to make sure you and your business continue to enjoy profits even while you’re not trading; or trading to a lesser capacity.
Business interruption insurance doesn’t go on forever though, usually it has a coverage limit of 3 to 6 months beginning from the time of the loss and continuing until the time the business is back up and running at its pre loss state. however, in some cases where businesses have a long production lead time a longer term of cover might have to be negotiated.
As an example; a banana growing enterprise was had its trees wiped out in a cyclone and had to start over again. Sure they held a business interruption policy but, with only 3 months cover – what good is that when it would take them at least 2 years for trees to become productive again? In that case the banana farmer had to sell up and move on – he didn’t use an insurance broker and took out the cover as a low cost add-on to his otherwise hopelessly inadequate insurance cover which he purchased direct from one of the big insurers call centres – had he got it right, he would have been compensated and remained on the land.
Back To Top
What triggers a Business Interruption Insurance policy?
Business interruption insurance requires a 3 primary elements to trigger coverage for instance; a business as a direct result of a defined event (1) must suffer loss of business income (2) due to the necessity for the business to shut down either wholly or in part or otherwise reduce its business operations (3) while repairs to the premises are carried out. [defined events are usually linked to the same Insured Perils covered under the business’s material damage insurance for such things as fire, storm, tempest, earthquake, cyclone, flood, explosion – however, it may be necessary for some businesses in shopping centres and similar congested areas to include ‘consequential loss’ and perhaps ‘contingent business interruption’ in their business interruption cover - where for instance ‘obstruction of ingress and egress’ is a common cause of claim where customers could be effected by something going wrong at neighboring business premises]
Example: A boutique Hotel located in a narrow city street: A fire occurs down the street which becomes so intense that underground water and sewage lines are damaged and electricity is cut off. The building has to be demolished and for the next few weeks, traffic on the street is brought to a standstill as result of trucks and earthmovers undertaking repairs. The Hotel suffers an almost total loss of business from staying guests and from its amenities such as restaurants and bars etc’, customers just can’t get to the Hotel, and because of unpleasant odors and excessive noise, and staff don’t want to come in either. This remains the case for several weeks before things are back to almost normal – without ‘obstruction of ingress and egress’ included on their business interruption policy they wouldn’t get compensated for their loss as the fire was not at the hotel premises – this is often called ‘consequential loss’ which is also a necessary defined peril to consider including in any business interruption insurance policy.
Back To Top
What is ‘Business Income’ In Terms of a Business Interruption Policy?
Business income for the purposes of a business interruption insurance policy is simply, is the reduction of the insured’s net income, plus continuing normal operating expenses. It may be business income other than rental value, or limited to rental value only.
What is extra expense cover?
These are necessary extra expenses during the period of restoration that a business would not have incurred had there been no loss or damage to covered property. Coverage usually includes expenses incurred to:
- Avoid or minimize the suspension of business and to continue operations, or
- Minimize suspension of business if operations cannot continue, or
- Minimize suspension of business if operations cannot continue, or
The latter is usually covered only to the extent that it reduces the amount of loss that would otherwise be payable.
Back To Top
What if I can operate my business at a temporary location rather than suspend operations?
If your premises are damaged as a result of a covered loss and you can operate at a temporary location, you need to buy extra expense coverage. Extra Expense coverage will cover your costs above and beyond your normal operating expenses for you to continue operating your business at a temporary location. Among other things it also covers the cost of relocation. Extra expense coverage is a compliment to business interruption. For your protection it is wise to purchase both coverages.
What if my business is interrupted due to a loss at my supplier? My premises are ok, what happens then?
When your supplier is shut down, that is a situation out of your control. To protect your business you need to buy a coverage called Contingent Business Interruption. It will provide coverage when you have to suspend your business operations as a result of a covered loss to your independent supplier.
As a landlord what happens if my building is untenable?
The coverage you would buy is called ‘Loss of Rent’. Its business interruption coverage for apartment and office buildings that covers the rents you would have received if your building had not suffered a covered loss and were tenable.
Back To Top
What is the period of restoration?
This is the length of time immediately after the time of loss, or after a stated waiting period. It ends when the property should be repaired, rebuilt, or replaced, or the date business is resumed at a new permanent location; Business interruption insurance usually only has a coverage period for 3 to 6 months thus, it for business’s which have a long production lead time will require a longer term of cover period. See also “What is a waiting period?” next”
What is a waiting period?
Some policies contain a provision that states that the period of restoration starts after 72 hours post-loss. The initial 72 hours without business interruption coverage is the waiting period. This is the case for most business interruption polices however, the term varies from insurer to insurer but, rarely exceeds a period of more than 2 weeks.
What is co-insurance?
It is a provision in most insurance policies that requires the insured to carry an amount of insurance equal to or greater than a specified percentage of the total insured value of the property or exposure at risk.
What is net income?
This is the net profit or loss that would have been earned or incurred had it not been for the occurrence of the loss.
What are non-continuing expenses?
These are normal expenses that do not continue during the period of restoration. Expenses that do not continue may reduce the loss the insured would otherwise incur.
Back To Top
What is business income loss from dependent properties?
This is the business income loss from suspension of the insured’s operations because of loss or damage to the property of organisations the insured is dependent on, but doesn’t own or operate – a rental property for example.
What service does a forensic accountant provide?
A forensic accountant combines accounting and auditing with investigative expertise to produce a calculation of business income loss.
What can I expect to happen in the event of a claim?
Every claim is different, and various policy provisions, state laws and regulations apply which may result in different requirements and results. However, in resolving a business income loss claim, a professional claims adjuster will usually take the following steps:
- Determine coverage and damages. You can expect the claim adjuster to meet with you in person or over the phone in the first days after the loss to explain the claims process, and help you understand what is needed to resolve your claim.
- Gather documentation. The claim adjuster will explain the information needed to resolve the business income portion of your claim.
- Determine the amount of business income loss. You can expect the claims adjuster to work with you, along with your accountant or representative, and possibly an independent forensic accountant, to determine the business income loss.
The amount of time it takes to complete these steps depends on the complexity of the loss, the availability of documentation, and other factors.
Back To Top
What will I need to provide the claims examiner to help resolve my claim?
- appropriate records including;
- profit and loss statements;
- income statements;
- tax records and historical sales records for the two prior accounting years; (if available)
- record of extra expenses incurred to resume business operations;
- copy of lease or leases, covenants and by-laws, if applicable;
- record of non-continuing expenses;
- other business records needed to substantiate the loss;
What else can I do to help resolve my claim?
- when possible, make sure your accountant is available
- maintain an accurate record of sales and operations expenses that continue after a loss
- maintain accurate records of extra expenses
- communicate with clients/customers describing when and how operations will resume
- consider and implement reasonable action to avert or mitigate loss. This may include but, isn’t limited to:
- continuing partial operations to the extent feasible
- rental of a temporary facility
- the expedition of repairs or replacement of stock and equipment to resume business
- outsourcing of some operations to other organizations.
RGIB’s Business Interruption division is the market leader for business interruption insurance – we’ll make sure you get the right business interruption cover for your business
Back To Home
