Business Interruption Insurance (or BI, for short)
Business Interruption Insurance is one of the most, if not the most, valuable covers available. What is Business Interruption Insurance, and what can you do to ensure your business continues to trade if a large-scale loss were to occur?
If a fire caused your workplace to be temporarily unusable, what would you do next?
Would your business be able to pay utilities, wages, or any other standing charges without income?
It could take months before the damaged property is rebuilt and the stock, machinery and equipment are repaired or replaced. Ideally, you would move to a temporary location while your permanent place of business is being repaired. Yet, traditional property insurance does not cover this move or a loss of income when a business must temporarily close. This setback can be minimised by adding business interruption (BI) insurance to your property insurance policy.
What can be included in a BI Policy?
- Compensation for lost income if you had to vacate its premises as a result of disaster-related damage covered under a property insurance policy.
- Compensation for the gross profits that would have been earned based on previous financial records, had the major loss/peril not occurred.
- Operating expenses, such as utilities, that must be paid even though business temporarily ceased.
- The increased cost of working, including expenses of operating in a temporary location while repairs to the permanent location are completed.
Considerations for BI Insurance
- BI insurance cannot be purchased on its own, it must be added to an existing insurance policy, such as property or office insurance.
- Purchasers must also determine that the policy’s maximum indemnity period is sufficient to cover the amount of time it will take for the business to recover following a major loss. This includes considering the worst damage or disaster that the business could incur, estimating how long it will take to repair or replace buildings, machinery and stock, and determining the length of time it will take to recover customers and market share.
- Price of cover depends on the risk of disaster to the premises. This may depend on the business location, nature of the business and how easily the business could function at an alternate location.
Since property insurance only covers the cost of physical loss or damage and contents of a business in the event of a disaster, BI cover is invaluable in covering the loss of income while the permanent business location is being repaired.
6 Steps to Minimise Business Interruptions
It’s clear that implementing steps to prepare for and respond to disasters is crucial to help your business reduce the risk of experiencing large-scale losses. In order to protect your business from unavoidable interruptions, it’s important to have an effective business continuity plan (BCP) in place.
Determine the Risk
When determining the potential risks for business interruptions, consider both environmental risks and human risks. Additionally, consider which risks are preventable and which are not.
Once the risks are identified, you can begin to understand all elements involved, such as the hazard itself, the assets at risk, vulnerability to the risk and the ultimate impact of the risk. In order to be best prepared, rank each risk according to the likelihood of occurrence and the severity of impact.
Calculate the Cost of Interruptions
After the risks have been ranked, analyse the impact of each risk. In calculating cost containment, the following should be considered:
- Lost sales or income
- Increased expenses
- Regulatory fines or contractual penalties
- Potential business delays
Understand Your Insurance Cover
The next step would be to review your insurance cover. Business interruption insurance generally comes into effect in these circumstances:
- Physical damage (e.g. fire or flood) to the premises causes suspended operations.
- Damage to property that is covered by the policy prevents customers or employees from accessing the business.
Since business interruption cover can differ significantly, it is important to understand the policy terms, such as exclusions, extensions, cover limits and indemnity periods. Be sure to review your policy carefully with a certified insurance broker to ensure bespoke cover for your unique business needs.
Implement Steps for Prevention and Mitigation
There are three different approaches for controlling and containing potential hazards:
- Prevention: This method identifies preventable hazards and implements steps to avoid occurrence of the hazards.
- Deterrence: This method identifies potential criminal activities that create business hazards. Steps are taken to prevent the criminal activities.
- Mitigation: This method identifies hazards that cannot be prevented. Steps are taken to control and contain the hazards in case of an occurrence.
Create a Crisis Communication Protocol
As part of your BCP, it’s important to establish a crisis communication protocol in order to provide employees and customers with updates and critical information. The protocol should include the following:
- A chain of command: A chain of command allows for information to be shared efficiently and ensures that all personnel receive proper information in the event of a disaster.
- Pre-scripted messages: Eliminate confusion by pre-scripting messages that will be shared with customers, employees, and the public in the event of a disaster.
- A bi-directional communication network: Allow for communication to occur in multiple directions in order to efficiently pass information in the midst of a disaster.
Prepare an Incident Response Plan
In addition to a crisis communication protocol, your BCP should include an incident response plan to ensure your organisation is prepared to respond appropriately and efficiently to a disaster. This plan should be practised and reviewed regularly for effectiveness. Specifically, the plan should include the following elements:
- IT and data recovery: Implement a data backup programme to protect and recover important information. Enforce workplace policies that assist in both preventing and mitigating the impact of a data breach. Further, consider developing a separate cyber-continuity and incident response plan with your staff to address your organisation’s unique cyber-security risks.
- Contracts: Pre-arrange written contracts with other businesses and external suppliers in order to continue fulfilling commitments to customers.
- Resources: Prepare an inventory of resources that are essential to regaining the ability to operate as a business.
- Testing and training: Run a test of the plan to ensure the plan is successful. Offer routine staff training to make sure employees understand their responsibilities in helping execute the plan.
By taking these steps, it is possible to minimise potential business interruption risks and limit the impact of unexpected disasters. Contact us today for further business continuity guidance and to discuss bespoke business interruption insurance solutions.
https://www.turnerinsurance.co.uk/commercial/business-property-loss-of-profits/