The Importance of Insuring for Business Interruption

business-interruption

There is quite an alarming number of businesses that don’t consider Business Interruption to be an integral part of their insurance program. 

If a loss were to occur where the operation of the business is affected and they can no longer trade at the same level or at all, insuring for Business Interruption could prove to be a valuable and economical decision. 

Whether you are a business owner or a commercial property owner, insuring your physical assets is not completely protecting yourself. Cover for the financial aspect of your business can also be crucially important following a significant loss from an Insured Event such as storm, fire or flood to name a few.

A recent survey held by CGU Insurance in 2016 found:

  • 1 in 4 small businesses would not survive if they had to close their doors for three months; 
  • 38% of small businesses would shut down if they experienced a business disruption during a busy time; 
  • 1 in 7 businesses experienced a shortfall in income because of business interruption in the past 12 months; and  
  • Despite these findings, less than 35% of business owners actually hold business interruption insurance. 

A question all commercial clients should ask themselves…

"Would you survive an interruption which caused a significant reduction in sales and thus turnover, or would you be able to manage costs should your rental income cease? "

So what is Business Interruption (otherwise known as consequential loss) and what does it protect?

Business Interruption would protect your business following a material loss claim for loss of business profits or if you are a commercial property owner, loss of rental income.

The cover could include relocation costs, staff wages/overtime, and additional expenditures that could be incurred at this difficult time. The inclusion of business interruption cover would allow the business to continue to trade at the same level prior to the loss or supplement your loss of income during the reinstatement process.

The following is a brief summary of a claims scenario which demonstrates why having this type of insurance is extremely beneficial in keeping a business afloat following a major loss:

Taken from: “Business Interruption Insurance and Claims – A Practical Guide” by Dr. Allan Manning
  • A dry cleaning business experienced a significant fire which originated from a box around a transformer attached to a down-light in the ceiling that ignited after it overheated. The fire (although detected) spread so rapidly that the entire three floors of the building including all plant and machinery, stock and customer’s goods, as well as the roof were severely affected.
  • The business unfortunately did not have a business continuity plan in place (as most businesses) however they did fortunately have backups of their records, so data such as customer lists, equipment software, financial records etc. were not lost.
  • Several hurdles which were presented included investigation costs, sourcing suitable premises for relocation, subsequent advertising costs, rental costs, sourcing processing equipment, retaining staff, wages, customer claims for loss of goods, reputation from publicity, maintaining existing customers, accountants fees and claims preparation costs.
  • After 18 grueling months, the business completed recovered. The insurance company settled the customer goods at a value of $595,000. Luckily, this particular business had sufficient coverage in place to sustain the loss and keep its doors open, but this is not always the case.
  • To read the in depth story, please follow the link below: http://cms.lmigroup.com/bi-explained/au/case-study-bancrofts-dry-cleaners/

It is unfortunately common practice that most clients don’t often think about the repercussions of not insuring for business interruption, leaving some businesses in a situation where they may have to accept a cash settlement rather than reinstating and maintaining their livelihood. 

It is a common saying that you get what you pay for and with insurance this is quite often the case.

Business Interruption can be quite a complex risk especially with claim calculations and settlements. Therefore, should you have any additional questions or queries or wish to obtain a quotation, please don’t hesitate to contact our office.

 

Kyla Parry

Account Executive | Austbrokers City State

 

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