Taking out any sort of business insurance isn’t something most people find exciting and stimulating.
For the most part, insurance is something of a grudge purchase. When you can’t see what you’re paying for, and the chances of ever needing it seem remote at best, it becomes something that gets pushed to the bottom of the to-do list.
Business Interruption Insurance (also called Business Income Insurance) is no different. In fact, it is one of the most overlooked and underutilized insurance out there.
Why is that?
Even the most cautious and astute business owners are often under the impression that their stand alone building insurance, coupled with their contents insurance, will more than cover them in the instance of a disaster, such a fire, flood or break-in. Replace your computers and printers, perhaps get a new stationary cupboard and a couple of desks and you’re on your way.
To a certain extent, this is true. The cost of repairing or rebuilding your company property, and replacing physical items such as computers, furniture, stock and so on should be covered under your building and contents insurance. A vital expense, to be sure.
But what these policies don’t cover is the loss of income your business will experience while repairs are taking place.
Let’s think about this for a moment. Any sort of major renovation, rebuild or replacement will almost always take longer and cost more than you think. And during this time, how will you pay your staff with no money coming in? How will you service your clients without stock or any viable means of communication?
This is where Business Interruption Insurance kicks in and can prevent a business interruption from becoming a business termination.
What Does Business Interruption Insurance Cover?
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Business Interruption Insurance covers the actual loss of business income – including payroll – that you experience as a result of having to suspend operations while your building or business is being restored. It usually includes what’s known in insurance circles as a material damage proviso, which means that as soon as there’s a claim made against your contents or buildings insurance, it cuts in to cover loss of revenue, loss of rental income, and any staff-related costs. It’s worth doing the math. Close your doors for 30 days and add up the cost of operations, minus the income that you would normally enjoy. Most likely those figures will make you wince.
This type of insurance is designed to keep your business in the same financial position it would be in if there hadn’t been a disaster. No one ever expects their business to flood or catch fire, but it just takes a burst pipe or an electrical short and you could arrive at work the next morning to find your office under a meter of water, or, worse, destroyed by fire. The very nature of accidents like these dictates that they are unplanned and unforeseeable – but they do happen. Even the most stringent health and safety conscious businesses have suffered damage from a careless employee hurriedly throwing a cigarette into a bin. Yes, it happens.
Do I Really Need Business Interruption Insurance?
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This really depends on you, and the nature of your business. If you carry a lot of stock, or you need your precise business premises to operate effectively, then this kind of insurance is likely the only way you’d be able to survive a physical disaster. But if you could feasibly be operational again within a couple of days from another office, then maybe you’ll be able to ride out the restoration period on your own. Only you will know that for sure.
However, there are other factors that need a little consideration.
You would also need to take customer loyalty into account – will your clients stay loyal if you’re unable to help them with their orders for a couple of weeks, or a couple of months? Is it likely that a competitor will swoop in and draw your customers away during this time of uncertainty? Will a situation like this shake your staff up and encourage them to seek employment in a more stable environment? Are you carrying imported stock that is difficult to replace, or does your business hold customer’s personal and precious items that are irreplaceable?
The facts show that even when your business is fully operational again, you may never fully recover from the loss of customers. So it stands to reason that in today’s driven, competitive and volatile market, you would take every reasonable precaution to protect your business.
Some interesting facts:
An online report by Safety Management UK states that 70% of businesses do not reopen after a fire. Most business owners are careful to cover themselves for fraud or theft, but let’s face it – a fire is always something that happens to someone else.
Further research shows that 40% of businesses which suffered a disaster (including natural disasters) did not reopen, and of those that did, 29% were closed within a year.
An additional factor which is often overlooked is the loss of data and technology. Ryan Scott states in his article on Forbes “… and guess what likely becomes of those that lost their information technology for nine days or more after a disaster? Bankruptcy within a year.”
Nine days? That’s a surprisingly short time to sink a business.
As with all insurance, whether or not you want to take out business interruption insurance, and how much you need, needs careful thought and discussion with a qualified Insurance Broker.
This article should not be considered legal or financial advice and is for information purposes only. You should consult with a professional financial advisor to determine what may be best for your individual needs.
Integration, Cause. “Will Your Business Recover From Disaster?” Forbes. Forbes Magazine, 30 Mar. 2016. Web. 21 June 2017.
Yates, Ben. “Is Yours One of the 70% of Businesses That Would Fail after a Fire?” 70% of Businesses Fail after a Fire? Safety Management UK, n.d. Web. 21 June 2017.