In the dynamic world of business, uncertainties are inevitable. Whether it’s a natural disaster, fire, or unforeseen circumstances, disruptions to your operations can have a severe impact on your firm’s financial health. That’s where Business Interruption (BI) Insurance becomes invaluable.
The Need for Business Interruption Cover
BI is designed to protect your business from the financial fallout of disruptions, providing a safety net for continued stability. It is often just one element of a commercial combined or SME package insurance policy. However it is worthy of careful consideration and careful examination in its own right.
Policy Coverage
Suitable Business interruption insurance should ensure your business resumes trading position in the same circumstances it was experiencing before the unfortunate event took place. The majority of products will cover business interruption due to issues caused by fire, storm or flooding that impacts your premises or the failure of essential equipment.
Policies are available to protect against the possibility of access to your business premises being restricted or incidents that impact your firm but have occurred by a key supplier/client. Separate specialist policies are also available to insure against cyber related risks that could significantly impact your company’s ability to trade.
Calculating Business Interruption Sum Insured
Determining the right sum insured for your Business Interruption coverage is crucial. To calculate the BI sum insured, identify as accurately as possible the following factors:
Gross Profit – forecast a figure for the coming 12 months (this amount may need to be periodically reviewed during the policy period as discussed further down the article.)
Contingencies – establish potential risks associated with your supply chain and factor in coverage for interruptions beyond your immediate control.
Maximum Indemnity Period (MIP) – consider the duration for which you would need coverage during any recovery period. This period is typically aligned with the time it takes to resume normal business operations. An MIP can be set at 12, 18, 24, 36 or 60 months. After this period- then claim payments will stop cease, even if the maximum sum insured has not been depleted fully.
Our experienced team is here to guide you through this process, ensuring that your sum insured accurately reflects the unique aspects of your business.
Declaration vs. Traditional Sum Insured Forecast
Understanding the nuances between declaration-based and traditional sum insured forecast is crucial in tailoring your coverage to specific business needs. Declaration linked cover is an alternative to the more traditional “sum insured” based BI cover. Under declaration based policies insurers accept an additional premium during the policy period to reflect the increased risk of a business performing above expectations. This prevents the risk of an insurer applying an “average clause” to reduce a claim settlement amount if an incident occurs the businesses actual performance was higher than forecasted.
Declaration-Based Sum Insured
Pros:
Flexibility – Adjust coverage throughout the policy period based on changes in business activity.
Accuracy – Reflects real-time changes, ensuring your coverage is always aligned with your business’s current state.
Cons:
Administrative Effort – Requires regular updates and declarations to maintain accuracy.
Traditional Sum Insured Forecast
Pros:
Stability – Provides a fixed sum insured for the policy period, reducing the need for frequent updates.
Cons:
Rigid – May not account for fluctuations in business activity.
Choosing between the two depends on the nature of your business and its susceptibility to changes. Our experts can help you find the right balance.
Practical Application of Underinsurance Average Clause
Underinsurance can pose a significant risk when it comes to BI claims. The underinsurance average clause is a mechanism that adjusts your claim pay-out if the sum insured is found to be less than the actual loss.
Example:
Suppose your business’s insurance policy is based on a forecasted gross profit of £25 million. However it actually achieves £30 million. Your business subsequently needs to make a BI claim for £500,000. If the underinsurance average clause is applied by the insurer, they potentially would only cover 80% of the claim, resulting in a pay-out of £400,000.
This highlights how it is crucial to regularly review and adjust your sum insured to avoid underinsurance pitfalls.
Additional Increased Costs of Working (AICOW) Insurance
AICOW insurance is an essential component of Business Interruption coverage, addressing the additional expenses incurred to minimize the impact of a disruption. This can include costs associated with relocating to a temporary facility, expedited shipping, or other necessary measures to ensure the resumption of normal business operations without avoidable delays. For example in the event of a significant event, such as a fire, AICOW might fully cover the fit out costs at a new warehouse location.
Understanding the intricacies of Business Interruption Insurance and its associated components is vital for safeguarding your business’s financial health. Our dedicated team is here to assist you in navigating these complexities and tailoring a solution that best meets your unique needs. If you have any questions or require further clarification, please don’t hesitate to reach out.
Stay resilient,
Plan Insurance Brokers