When the disaster strikes, the basic question for any small and medium enterprises (SMEs) is how to reinstate the property to run the business operation smoothly. It is a nightmare for a business owner to see his factory or warehouse destroyed by fire. Little do they realise that mere restoring or reinstating the property in a pre-fire level is not the foolproof that the operations will run profitably immediately thereafter as before.
A business that has to close down while the premises or factory building are being repaired may lose out to competition as its market share is diminished. Any interruption in regular business following fire or other perils could be a major setback that threatens very survival of business, particularly when the margin is so tight. Beside from struggling to stay afloat financially when there is no incoming revenue forthcoming, many business owners eventually see that they fall behind paying their regular bills or wages to their workers.
Nevertheless, there is a way to protect the business from an all-out disaster â€“ the answer is by buying â€śBusiness Interruption Insurance Policyâ€ť. It is essential for the SMEs to consider business interruption insurance so that the loss of earning is minimised.
What is business interruption insurance?
When a property used for a business is damaged by an insured peril, the regular business activities are interrupted causing a serious financial loss in terms of â€śLoss of Profitâ€ť which is not covered by a regular Fire policy.
The purpose of taking business interruption cover is to protect a business against shortfall in sales following an insured loss such as fire or storm etc. It will pay for ongoing costs such as lease of the business premises, payroll and mortgage, as well as covering loss of profits. In effect, the insurer takes the place of businessâ€™s customers, making up the resulting loss of gross profit caused by a shortage of turnover. Interestingly, it is known in many forms. In insurance parlance, it is often called â€śconsequential Loss insuranceâ€ť or â€śLoss of Profits Insuranceâ€ť etc.
How the interruption arises?
The interruption in normal trading may arise from the following causes:
- Loss of or damage to the business ownerâ€™s property arising from an insured peril
- A peril occurs such as fire to other property such as in a shopping complex whereby customers cannot have access to the business owner although his shop did not have fire
- Loss or damage occurred by an insured peril to a supplierâ€™s warehouse causing disruption of supply of raw materials leading to stoppage of production although the business owner did not have any material damage to his property
What the business interruption policy covers?
The Business Interruption policy (BI) is designed to protect against such trading losses by paying:-
- Loss of gross profit due to reduction in turnover
- Continuing overhead expenses which have to be met regardless of stoppage of trading activity
- Wages to key personnel who continue to be employed during the period of interruption
- Wages in lieu of notice to employees whose services are no longer required
- Additional working costs (reasonably incurred) to restore normalcy in production level
- Overtime payments in an effort to fulfil urgent orders and/or catch up on deferred production
- Accountants fees and expenses whose services are required to work out the amount of profits that have been lost following material damage to the property
- In essence, the insurable loss is restricted to that which results from an interruption to the business consequent upon damage to the buildings or other property used by the insured, provided such damage was caused by an insured peril and that the damage was itself, insured.
What it does not cover?
Although the obvious item of financial loss which is the profits that are lost as a result of stoppage of normal business trading activity, traditionally known as sum assured, the cover does not pay the following losses:-
- Under insurance applied against material damage
- inflation related stock value variance
- Depreciation of damaged stock following fire
- Third party claims and litigation costs
- Failure to recover book debt following destruction of records
- Fines, penalties and damages
- Loss of goodwill or loss of market share
- Losses arising from forced sale
- Losses arising from discontinuing the business
- Thus, the essence of business interruption insurance is to provide access to funds quickly to ensure a fast recovery without too much impact on the businessâ€™s bottom line.
The author is a former Underwriter of GIO Re Australia and currently is the Director of International Business with Kaden Boriss Lawyers Australia in Sydney.
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