What is business interruption insurance?
Small business success in Victoria is about managing the eb and flow of business where a company survives in the challenging times and thrives in the robust times. Even businesses with baseline continuity will face challenges resulting in a drop in income and sustainability. COVID-19 for many small businesses has been a wakeup call as industries across the world face a slowdown, shortages, less consumer use, and logistical nightmares. While Victoria has managed challenges at home, in our global world, we face the same impact here as businesses in the U.K., E.U., U.S., and Asia.
Without cashflow, your business will need to make important adjustments and decisions just to survive.
Business interruption insurance will protect you in challenging times providing the ability to pay ongoing business expenses, meeting business needs, and maintaining payroll.
While business interruption insurance isn’t new to most business owners, the details of what it may cover, or whether it is a worthwhile investment are often misunderstood.
Business interruption insurance explained
Business interruption insurance is a type of insurance that protects you from a loss of income while your business manages a disaster. Many business owners look at this type of insurance as a way to rebuild after a natural disaster such as wildfires, tsunami, or earthquake. Business interruption insurance can cover lost income due to destroyed merchandise, lost earnings, relocation of your business, and more.
In addition to loss of property due to theft and disaster, many insurers have opted to expand the breadth of coverage to include coverage due to closure of business by a public authority such as is the case with infectious diseases. However, your businesses policy will specifically list the disasters that your business is covered under.
If a specific disaster or interruption is not listed, it is likely that your insurance does not cover that that type of disaster.
With outbreaks such as SARS in 2013, Legionnaires disease, measles, and COVID-19 business interruption insurance is being once again evaluated in cases where insurers can provide business interruption insurance while at the same time not losing so much money that insurance companies cannot finance massive losses during a pandemic with a complete shutdown of non-essential businesses.
What may be covered by business interruption insurance
The confusion many businesses owners face when looking at business interruption insurance is, what exactly will my insurance policy cover?
The reality is that each business is unique and disasters that may affect your business may not affect another business. In addition, it is important to know that business interruption insurance is not considered a stand-alone policy, but rather an add-on to a property insurance plan or comprehensive plan. However, despite the differences in business coverage, the following are commonly covered:
- Fixed and overhead costs: These are the costs your business will be responsible for whether operating or not.
- Temporary relocation: Expenses associated with temporarily relocating your business after a loss such as fire, earthquake, or significant property damage.
- Utility disruption: Costs associated with a disruption that is caused by utility and service providers such as power, internet, communication, and water.
- Loss of profit: Insurance may cover loss of profit, based off previous months’ income.
- Additional expenses: Expenses beyond fixed costs that are necessary to keep your business in operation while property damage is repaired.
One of the most key factors when considering business interruption insurance is the indemnity period. The indemnity period is the length of time that the business owner can claim benefits form their business interruption policy. The period of indemnity usually also denotes the time compensation is payable under the policy.
Most policies will operate with indemnity periods of 12, 24, or 36 months of which it is important to understand the reality of loss and to not underestimate the time it will take to bring your business back to full operating capacity.
Due to the difficulty in determining how long it will take restoration of your property or the time to bring your business back to full capacity. Business interruption policies will include an extended period of indemnity. This extended coverage may include restoration of business, property, income, as well as enables the policyholder to recoup pre-opening expenses including advertising and public relations to rebuild prior-to-loss levels.
Business interruption insurance has been around for hundreds of years, however, only about 40% of Small and Mid-size Enterprises (SMEs) in Australia carry the coverage. As an add-on to current Property Loss or Comprehensive insurance policies, it’s reported that as many as a quarter of SMEs had never heard of this type of policy coverage.
Business interruption insurance can be your failsafe to protect your business from losses such as property, income, and additional operating costs in case of disasters such as theft, fire, earthquake. While many business interruption policies avoid infectious disease, due to outbreaks of SARS and COVID-19 the industry has begun broadening its coverage types.