Business Interruption Insurance: Why Businesses Should Consider This Cover
Many entrepreneurs believe that setbacks are a right of passage on the road to success. If you run a small business, then you would be familiar with unexpected setbacks. That's why it's important for small business owners to consider business interruption insurance to face these events.
Wouldn't it be great that with every challenge you face you could soften the blow? Business Interruption (BI) is one of the most overlooked and misunderstood insurance covers in the market, however, it could be the best defence strategy in your business.
What is Business Interruption Insurance?
There is a lot of confusion about what BI is and what it covers. BI insurance can help your business to keep running after a catastrophic event such as fire, by covering ongoing your costs so you can recover and rebuild.
Business interruption insurance helps put you back into the same financial position that you would have been before to the interruption.
Andrew Norris, from QBE Insurance Australia, said that most cases claims are triggered by weather or fire events.
However, not every BI insurance claim is related to weather events. Take this real-life scenario of one of our clients, who owns a local cafe. They suffered damaged timber floors as a result of a burst water pipe from a dishwasher and had to replace the entire timber floor, stopping trade for three weeks.
By closing for three weeks, they faced the loss of trade and earnings over a busy long weekend. In addition, their wages and running costs were still outlaid during this time.
The total paid by the insurer was over $36,000 for this client.
What does Business Interruption insurance cover?
BI takes into consideration the direct and indirect impacts of a disruption to normal business operations and business cashflow.
Dr Allan Manning, from LMI Group, said that about 70 per cent of claims arise because of property damage. In comparison, 30 per cent arise because of dependencies away from the premises.
Many businesses are affected when public utilities become damaged from a severe storm or bushfire. Due to these services covering a wide geographic area, there are major delays concerning restoration.
Most policies include cover for:
- Loss of sales during the affected period
- Ongoing operating expenses, such as electricity, rent, wages and loan repayments
- Relocation costs for moving to, and operating from, a temporary location
- Closure of your business premises due to government-ordered street closures or curfews
- Damage to a suppliers premises which has a negative flow-on effect for your business operations
How do insurers calculate business interruption claims?
There a few factors that insurers must consider when calculating the claim value. These include:
- Loss of gross profit/rent,
- Additional expenses occurred (e.g. temporary power generators),
- Savings in expenses, and
- Claim preparation costs
- Other factors are also considered, such as seasonality and trends, records availability, and sales.
Are there any exclusions?
Like any other insurance, there are always exclusions in the policy. In the recent COVID pandemic, insurers didn't accept claims for BI as pandemics are excluded from BI cover.
Excess and waiting periods can also restrict claim payments.
However, that alone should not deter you. Thousands of BI claims are covered by insurers across Australia every year.
As with any insurance, understanding the policy wording and exclusions is essential so you can prepare for risks accordingly. That's why dealing with a broker can help make understanding your policy a breeze.
Is Business Interruption insurance worth it?
Well, it depends. Would you be able to recover if an unexpected event impacted your business?
Could you cover your fixed costs; such as loan repayments, wages and rent for weeks, if not months, while you get your business back on track?
If you answered yes, there are those who are impressed or envy your situation. But for the majority of business owners, this would put them in a compromising position.
We've had clients who fortunately had BI cover and experienced a significant setback in their business. They displayed gratitude to our brokers, thanking them for recommending this cover.
Why should I consider Business Interruption Insurance for my small business?
It isn't a mandatory requirement to have BI insurance for your business. But imagine yourself with the confidence knowing that you're prepared to face setbacks in your business if they did occur.
That peace of mind, for many, is worth every cent.
This article originally appeared on Macey Insurance Brokers (Brokers Blog) and has been published here with permission.