Business Interruption Confusion continues and Underinsurance remains a key problem, suggests CII
Companies need to ensure they are not leaving themselves underinsured when it comes to business interruption insurance, according to a key industry body.
Business interruption insurance covers the loss of income that a business suffers following a loss, and is considered an essential cover for a large swathe of companies. The cover protects the cash flow and profits whilst the business recovers, the aim being for the insured to be in the same position after the loss that they would have been in if the loss had not occurred.
The CII report
In a recent report by the Chartered Insurance Institute , however, too many business interruption policy wordings do not tally with standard business practice, particularly where the issue of gross profit is concerned, which means that many UK businesses could effectively be underinsured.
The CII says that gross profit in a standard business interruption policy is typically defined as:
‘Turnover plus closing stock and work in progress less Uninsured working expenses plus opening stock and work in progress’.
However, the CII points out that this definition of gross profit is not the same as an Accountancy Firm or Auditors’ definition of gross profit – a fact which it suggests leads to much confusion and underinsurance, as in most business interruption sum-insured calculations, uninsured working expenses are deducted from turnover to arrive at the insurable gross profit figure required for the policy. The problem of underinsurance for business interruption insurance is not only related to the policy wording. Too many businesses often fail to appreciate how long it would
take before their business would be up and running and generating the same levels of Gross Profit in the event of a major incident - a point covered by the policy indemnity period. Your business interruption indemnity period covers you from the point of loss, to the point it takes for you to be trading at the same level, as if the loss had never occurred, however, crucially, this is only if you have an adequate indemnity period.
For example, if your business interruption loss took 24 months to return to pre-loss levels of income, but you only had a 12 month indemnity period, you would have no cover for months 13-24. It is also critical to remember that the indemnity period should cover the time it would take to return to pre-loss trading, not just the length of time it would take to rebuild, relocate or reinstate. Often, these aspects can be taken care of relatively quickly, but returning to previous trading and recovering your client base will have a significant lag in most cases. This is where a number of businesses continue to underestimate this vital element. Have you really factored in just how long it will take to rebuild a building, or the lead times to replace vital stock, contents and machinery? And then have you factored in the time to fully recover turnover and profits?
To avoid the potential pitfall of underinsurance for business interruption, speak to us and we will be able to advise you on how to accurately calculate the indemnity period, as well as other key sums insured.
Every client is unique and we will evaluate individual circumstances, but as a rule of thumb, Towergate recommend a minimum indemnity period of 24 months. 12 months is often likely to be inadequate and 18 months could pose a real danger of the indemnity period running out before trading is fully restored.
Business interruption in brief
Business interruption insurance should be added to the overall business insurance policy, providing cover for loss of income and helping the business to recover in the event of an incident. Business interruption insurance details vary from insurer to insurer, but all are based on an accurate assessment of the amount of time it would take for your business to recover from an event that impacts your normal operations.
Policies can cover business interruption as a result of:
- Damage caused to your own premises or equipment caused by fire, storm, flood or a range of other accidental insured events
- Damage caused by similar events to third party property in the vicinity of your premises, preventing access
- Damage caused by similar events to premises or infrastructure of your public utility providers Policies can often be extended additionally to cover:
- Damage caused to the premises of your suppliers or clients or contract sites
- Mechanical or electrical breakdown of your essential plant items
Business insurance from Towergate
At Towergate we don’t just offer traditional insurance broking: we believe that prevention is better than cure. That is why we have our own risk management consultancy focusing on pre-loss mitigation and business continuity, and have developed our own business interruption calculator.
We engage actively with insurers and our clients to obtain protection for businesses of all sizes. Our wide range of covers help protect your organisation should the worst happen.
We are passionate about tackling the unprecedented levels of underinsurance in the UK: watch our video on how to avoid this for your business
About the author
Mark Brannon Cert CII is a respected industry leader with over 17 years’ industry experience in a variety of roles within the business insurance sector. He works across a wide spectrum of insurance product and policy development, delivery and optimisation for clients, including claims, insurer relationships, marketing and communications, and risk management.
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The information contained in this bulletin is based on sources that we believe are reliable and should be understood as general risk management and insurance information only. It is not intended to be taken as advice with respect to any specific or individual situation and cannot be relied upon as such. If you wish to discuss your specific requirements, please do not hesitate to contact your usual Towergate Insurance Brokers adviser.