If I had a pound for every time I’ve been asked “but why do I need Business Interruption Cover”, I’d be considerably better off than I am now.
People tend to think that they only need to insure property, and at a pinch, liability. So if you have a business where perhaps you own the building , contents and some stock, your prime concern is replacing these in the event of a disaster occurring. These are losses that are easy to recognize and quantify. If the results of the catastrophe stopped at this point it wouldn’t be too bad, but unfortunately other losses also arise as a consequence of the disaster. For this reason Business Interruption cover is also known as Consequential Loss insurance.
At this point I’d like to use an example.
Let’s say that a greetings card shop has a fire in October. The owner has paid out £30,000 for stock, £12,000 for displays and fixtures and perhaps £5,000 for other contents. All of these are easily quantified and the shop owner claims and receives a cheque for £47,000 from the insurer (less any excess). Meanwhile the builders who are repairing the building receive stage payments as they work towards getting the property back to its original condition. In the meantime no income is generated by the business. Nor will there be until either the shop owner has found another premises, bought new equipment, fitted out the shop, (the shop fitters are completely booked-up until December as they are not just sat around, waiting for disasters to happen), replaced the stock (orders for greetings cards are placed early in the year and manufacturers cannot cope with orders in October as they are flat out producing for the clients who ordered in February). The likelihood is that he won’t be up and running for Valentines day either.
The consequence? The business is highly unlikely to survive. Card shops (like many businesses) are dependent on season. The clients cheque from insurer will quickly be requisitioned by the bank who spot an opportunity to recoup their overdraft facility. The reality is that most businesses operate on small profit margins, in order to remain competitive, and any disruption to profitability is catastrophic. How often do we see shares in a company fall dramatically because their profit forecast is down a fraction of 1%. Even small reductions in profit make big differences to a business.
So how do we overcome this?
We invest in Business Interruption / Consequential Loss insurance.
The cover is relatively inexpensive. Effectively you insure against loss of profits following a claim. Insurers use either your gross profit figure, or gross fee income, or sometimes your turnover and charge accordingly. So, let’s use our Card Shop as an example; the insurers look to ensure that the card shop owner still makes the profit he would have made whilst matters are being rectified. This can take various different forms depending on what the insurers deem to be the most prudent route. They may decide that whilst the building works are going on, they can pay for the shop to be set up in a premises a few doors away in an empty unit in the same street, for fittings to be set up and then moved to the new premises in due course, for stock to be bought from manufacturers at a premium to ensure that the Card Shop still has goods to sell.
Alternatively the insurers may instead just pay the card shop owner for the profits he loses whilst the building is being rebuilt, as the most prudent option.
The result? A business up and running again in March with a refit courtesy of the insurers. Oh and a happy, relatively stress free, client.
If you think that this doesn’t apply to you because you don’t own a card shop, or because your business isn’t seasonal, or because you don’t own your premises then please think again. All businesses depend on steady income.
Business Interruption insurance is more complex than it appears. There are other factors (that I wont overburden this article with) to take into account, which is where our advice comes into play. Seek the advice of an Independent Broker, even if it’s not us. Remember it’s in our own best interest (as well as yours), for us to make sure that you survive and can afford to pay for insurance.
Paul Barry – Managing Director