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Business interruption insurance

27 April 2005
Business interruption insurance

As a businessman or woman, common sense tells you that to operate a business without insurance - whether buildings, contents, motor or employer's - would be tantamount to commercial suicide. Yet why do so many businesses cover those elements but not cover themselves against unforeseen interruption? Business interruption insurance (BII) is what they are missing.

BII has many facets, but in its ultimate aim it seeks to maintain the business's profits in the event of disaster of some kind. The problem that all businesses face is that if, for example, the premises are flooded or destroyed in a fire, time is required to get the business fully functioning again. Costs will still be incurred while production is down or non-existent. Staff still need to be paid even though the business cannot use them in the short term. This becomes particularly acute as the business is not in a state to bring in any money.

What is business interruption insurance?

BII operates in three ways. First, it covers the fixed, or ongoing, costs of a business that cannot be met out of any financial reserves the company may have. The majority of these need to be paid irrespective of whether work is possible. This might include leasing and staffing costs, business rates and mortgages.

Second, BII policies will cover any increased or new costs that are required to get the business up and running. This could cover finding a new site; redirecting post and telephones; acquiring new equipment; paying overtime; using "friendly competitors" to complete orders; buying new supplies, possibly at a higher rate; and advertisements to tell your customers of the temporary change in business circumstances.

Finally, a BII policy will pay enough money to maintain the level of net profit that the company had insured for.

BII is quite distinct from buildings and contents insurance in that they purely replace or repair the physical items insured, whereas BII ought to be thought of as a way of keeping a business alive while it recovers from a disaster.

What insurers look for

Should a business need to claim on its BII policy, it needs to be aware that the insurer will need to see accounts before any payments are made.

Insurers use a variety of accepted accounting principles to establish their liability to pay a claim. They would look for information on variable costs; data on fixed costs; net profit; revenue levels; and gross profit.

Make sure once you've taken out a BII policy that you keep it, the documentation and detailed business accounts information safe - you'll need it to make a claim. No insurer will pay out a claim unless the loss can be quantified.

Check the policy

When choosing a BII policy, or any other insurance policy for that matter, it is vital to check the wording used by the insurer. By their very nature, insurers use terminology which is neither vague nor open to confusion. For example, a policy may not cover any subsidiary companies, so if a business acquires another, it will need to change the terms of the policy. The insurer will detail what it will and what it will not pay for - make sure it matches your needs.

Reducing the premium

There are ways, as with other types of insurance, of reducing the premium charged.

Risk, and therefore premium, can be reduced by either installing greater fire protection or by separating areas of the working environment; by planning very carefully the organisation of work processes; and by writing a detailed contingency plan. The plan should cover actions to be taken following a disaster and have a detailed log of contact names and numbers of favoured contractors and suppliers who will help the business restart quickly.

Another tip: make sure that you regularly review the level of cover required - insurers reckon that most policy holders are underinsured. If your insurer finds that this is the case with you, it will pay out only a proportion of the claim.

Premium levels

Naturally, the amount you'll be charged for BII will depend on the type of business and the length of time that you'll want to be paid for. Insurers call this the "maximum indemnity period". The premium is dependent on the information supplied by the proposer, but it is quite reasonable.

For help in finding the right insurer for you, the best advice is to get a good broker. Local offices can be found in the Yellow Pages.

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