Business interruption insurance – covering the bottom line
Ensuring business continuity
Business interruption cover can mean the difference between resuming operations following a major loss or suffering financial collapse. It covers the loss suffered by a business resulting from an interruption to the business as a consequence of material damage to the insured property that it owns or operates.
Cover can be added to your Industrial Special Risks (ISR) or business pack (Biz Pack) policies – both insurance types have been covered in our recent business insurance series which can be found below.
Having business interruption cover may be critical to avoid large losses when a business is unable to operate or operate at full capacity after a property damage event.
In this article, we review the steps on how to best integrate business interruption insurance to your policy.
Overview – insurance policy
ISR insurance is a broad form of property insurance that covers all loss caused to property of every kind and description, unless excluded. It is also referred to as an ‘all risks’ policy.
1.1 You can read more here about how an ISR policy operates.
1.2 The coverage under an ISR policy consists of two sections. The first is ‘material loss or damage’ and the second is ‘business interruption’ (also referred to as consequential loss).
1.3 Material loss or damage covers all property for physical loss, destruction or damage not otherwise excluded by the policy.
1.4 Business interruption covers the loss resulting from the interruption or interference to the business as a consequence of material damage. Business interruption cover is only triggered after a material damage loss, with the exception of certain losses (discussed later in this article). The cover includes loss of profits or income for the period following the damage until the business resumes pre-loss production. Other examples of business interruption cover are discussed below.
What is covered by business interruption insurance?
1.5 Business interruption cover can prove critical in the event of a loss as it primarily provides cover for the loss of profits or gross income following physical loss or damage at the premises for a period following the loss until normal business operations are resumed.
1.6 So when your business is unable to operate due to a material damage event (such as a fire, storm or cyclone) it will inevitably lose revenue. At that same time it will continue to incur ongoing business expenses (rent, payments to suppliers and wages) as well as additional expenses as a result of the damage.
1.7 Business interruption insurance typically covers those losses and expenses, including:
(a) loss of revenue;
(b) rent and utility costs; and
(c) temporary hire or leasing costs of alternative premises (often referred to as additional increased cost of working) to enable the business to continue to operate until the business premises are repaired.
1.8 Business interruption cover is triggered by a material damage loss, although there are certain exceptions to this principle, which in insurance terminology are referred to as contingencies. Contingencies relate to risks which are remote to the insured business but which can cause disruption and losses that have a major impact on the ability of a business to maintain normal operations. Examples include:
(a) Prevention of access: where the business is unable to gain access to its own premises due to surrounding fire, storm and flood damage (to buildings, roads or bridges not owned by the business);
(b) Damage or destruction of property of a supplier/customer of the business: if a key supplier/customer of the insured business is affected by an insured event, there is cover available for financial loss suffered as a result of the supplier/customer being unable to supply their goods or services to the insured business; and
(c) Damage to public utilities: this refers to damage or disruption to utilities which are publicly available such as power, water, sewerage, gas and telecommunications. Cover is available for the loss that this causes.
1.9 Cover under the business interruption section for the above losses will be subject to a sub-limit agreed between the insurer and the insured business.
1.10 Business interruption insurance typically responds for an agreed period (the ‘indemnity period’) which should reflect the period from the date of loss until normal business operations are resumed following the loss. For example, the ‘indemnity period’ could be designated as 12 months.
1.11 We recommend reviewing the indemnity period by taking into account the likely time until the business will resume operations to the pre-loss capacity. That might include the consideration of the time it would take to completely rebuild a major operational site of a business.
1.12 ISR insurers typically apply a time excess (often 48 hours) before business interruption cover will apply. In effect, this is the loss which the business must itself bear.
1.13 Assessing a business interruption loss involves the calculation of the business’ forecast earnings had the loss not occurred. This process can involve evaluating past tax returns, profit and loss statements, and projected sales and expenses. Maintaining accurate records are important so that a business interruption loss or losses can be properly assessed. In addition, pre-loss reviews should be undertaken by businesses prior to commencement of the insurance period to ensure revenue calculations are tested and transparently disclosed to insurers in order to obtain adequate and accurate business interruption cover.
How we can support you
McCullough Robertson and our insurance advisory service, Allegiant IRS, can assist you with a review and assessment of your current insurance policy to ensure you have appropriate cover. We can also guide you through the process of redesign, placement and renewal of insurance cover for your business to ensure that it best fits your current or anticipated risk profile.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.