Business interruption insurance provides cover for loss of income as a result of damage to insured property or an unexpected incident which means that the business cannot operate as normal.
This policy aims to restore your business to the same position it was in prior to the loss, whilst also providing you with the funds to continue business as usual by paying wages, bills and maintaining profits.
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Business interruption insurance can be vital to keeping an organisation running. It can provide:
Primarily, the material damage cover portion of the policy would act first to rebuild or replace any property. Whilst the repair / replacement is being carried out, the policy would cover your reduced income during this period and the time taken to regain lost business.
Business interruption insurance doesn’t cover the following:
All businesses would benefit from having some level of business interruption cover, even if it is just to cover increased costs due to damage from an insured event.
Yes, the policy covers loss of rent.
Your insurance broker would work with you to calculate sums insured on either a loss of gross profit or loss of revenue basis.
Loss of revenue calculations are generally used by service industries (e.g. accountants, estate agents, and solicitors) as there is no cost of product to deduct so income is based on gross profit alone.
Loss of gross profit is normally used by companies that sell a product and has a cost associated with this (e.g. shops, factories, and wholesalers).
There are multiple variables to consider when deciding the sums insured and it is important this is adequate for whatever the basis of the business interruption as underinsurance conditions will apply. You will need to discuss this with your broker to make sure that your cover is calculated correctly.
Following a claim, loss adjustors would calculate the sum insured by looking at income and trends prior to the loss, and compare this with the loss during the period the business is interrupted (the indemnity period).
Yes, cover is available for staff wages.
Even if a company is in a development stage without sales revenue, there is a need for protection as you can quickly use up any cash reserves available.
Tailored policies are also available to protect R&D expenditure. This provides payments for the company’s costs during the interrupted period.
Increased cost of working (ICOW) is included, provided it is economical to the save the lost income. Cover can also be provided for additional increased cost of working (AICOW) but this isn’t included as standard.
ICOW covers additional costs your business incurs for the sole purpose of preventing or limiting a loss in turnover following an insured event (e.g. finding another premises, storage, temporary staff). ICOW is conditional on an ‘economic limit’. This means that all additional costs claimed for must be reasonable and reduce the ultimate loss of revenue or profit by at least an equivalent amount.
AICOW covers increased costs of working ‘in addition’ to the gross profit or revenue sums insured. AICOW is not subject to the ‘economic limit’ test.
The indemnity period is classified as the period that the business is interrupted and this is the length of time the insurance policy will pay for lost income benefits. Business interruption insurance tends to be arranged for a minimum of 12 months, but more often 24 or 36 months. This would be determined based on your business’ risk profile.
James has worked within insurance broking since 1999. He has worked for a variety of intermediaries, developing his skills, before joining Alan Boswell Group in…
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