Howden Insurance underscores the critical need for business interruption cover, often underestimated yet essential for continuity after major disruptions like fires. This insurance helps maintain revenue and manage recovery costs, ensuring businesses are not left exposed.
Business interruption cover is often overlooked, but it’s the one element of insurance that will keep your business running following a large or catastrophic loss such as a fire in the yard.
The purpose of business interruption insurance is to maintain the turnover of operations following an insured incident, so that you can be in the same trading position after the interruption as you would have been had the incident and subsequent loss not occurred.
There must be insured damage to the property for the business interruption cover to kick in. Although material damage to property needs to be insured, this doesn’t necessarily have to be by you, the policyholder – you may occupy a leased premises, which should therefore be insured by your landlord.
The insurance provided is limited by time, referred to as the “indemnity period”, as well as by a monetary amount (sum insured). The period begins on the day of the incident and ends when the business has made a full recovery, or on the expiry of the indemnity period, whichever occurs first.
So, what can be covered/paid?
Gross profit
This covers the loss of gross profit following a reduction in your turnover and any increased costs of working.
It’s a good fit for businesses with a sizeable volume of uninsured working expenses (directly variable costs, whereby a high element of turnover comprises of expenses that vary in direct proportion to it).
Standalone increased costs of working
There are likely to be increased costs arising following a serious incident, which the policyholder will need to incur to mitigate the effects of the loss.
Examples of increased costs are:
- Overtime payments
- Hire of alternative machinery
- Additional travel, transport, and expenses
This cover is automatically included and incorporated into either your gross profit or gross revenue limit of liability, but you may wish to have this cover solely on its own without gross profit cover. This should only be purchased when you’re certain a loss of profit from an interruption will not arise, but when you do anticipate a degree of increased costs. This could be where your operation has a large enough yard area to continue to trade without much difficulty. A temporary depollution bay may be installed, and machinery or plant hired in until damaged items are replaced.
If you have a sophisticated parts operation, then gross profit cover is a must.
Are you insured for long enough?
If you’re unfortunate enough to suffer a major incident, the right business interruption cover can mean the difference between getting back up and running and going out of business.
Whilst many businesses will purchase this insurance, they often don’t buy enough cover, which can lead to being underinsured. This means that the insurance won’t protect a business throughout the full cycle of a claim, leaving businesses high and dry when cover is needed the most.
If the indemnity period is too short, cover will end before the business is back up and running, and the operator will be left to face the rest of the recovery without any financial support from insurance cover.
Potential timescales following an incident
- Three months – Following a major incident, such as a large fire, insurers will carry out a forensic investigation to establish the cause before cover can be confirmed and any work can start to reinstate buildings etc. To make the building safe, gain access and conclude, this initial report can take an average of three months.
- Six months – Any significant work on the premises will need planning permission. The average time to obtain this, including time for plans to be drawn up, is six months.
- Nine months – After the incident, it’s likely that work can start on repairing or rebuilding the premises. Your business may have been able to continue in some form, but some processes or sales will face a delay until your premises are rebuilt.
- 15 months – A rebuild of premises could take six months, meaning the operator can begin to kit out premises around 15 months post-incident.
- 16 months – Provided that replacements for machinery lost in the initial incident have been ordered and have arrived, six weeks should be allowed for fit out and commissioning.
Whilst business can resume as usual, it can take many additional months to fully recover to the position a business was in before the incident occurred.
Remember, business interruption insurance can provide cover for loss of gross profit until that gross profit is no longer affected by the incident – the cover does not stop the moment the premises is reinstated.
Our recommendation
12 months’ cover is never enough. At Howden we always recommend a minimum of 24 months, but proper consideration needs to be given to how long it would take for your business to recover, and 36 months is definitely something to think about.
If you’d like to discuss any aspect of this article, please contact Client Director Steve Walker on 01384 375 555.
