Calculating Business Interruption Insurance
Business Interruption cover helps ensure business continuity following an insured incident, so getting the right cover is crucial. We’ve put together a list of 9 steps you can follow to ensure your Business Interruption policy will provide adequate cover when you need it most.
What Is Business Interruption Insurance?
Business interruption insurance – also known as time loss, consequential loss and loss of profits insurance – provides cover for any financial losses caused by an interruption to business practices. This may be due to material damage to property, or the premise in which you typically operate from. For example, imagine your office gets severely damaged by a fire. Apart from physical damage, you may also suffer from a loss of business income from which to pay business expenses and make a profit. Then there’s the costs associated with renting alternative premises. With Business Interruption Insurance, all of this would be covered, and you wouldn’t have to fork out for these expenses.
A step by step guide
1. Calculate and set the length of indemnity period needed for your business. As bad as it sounds, you’ll need to think and imagine the worst-case scenario. This will help you draw an accurate picture of the length of time needed for your business to return to normality. When assessing the time needed you’ll want to consider a variety of factors, such as building regulations and necessary permits.
2. Add an estimate of the time needed to retrain vital staff and the lead time in obtaining new equipment. Financial experts usually recommend a minimum indemnity period of 24 months.
3. Calculate the expected gross revenues of the business over the indemnity period. Project the past 12 to 24 months of your fees or sales forward, depending on the business, over the indemnity period. Adjust your calculations depending on whether your business expects to grow or decline and for expected inflation rates.
4. Calculate the expected gross profits of the business over the indemnity period. This equals expected gross revenues minus expected changes in inventory values, business material use and freight costs.
5. Calculate the costs of moving to and operating your business from other temporary premises during the indemnity period. This may apply to local trades people such as hairdressers, plumbers, electricians or small office-based businesses such real estate agents or business intermediaries. Include rentals, equipment hire, payroll, employee benefits, workers compensation and other employee allowances for staff at the temporary premises.
6. Calculate the expected saved expenses of your business during the indemnity period. These are expenses which will not be incurred because of the property loss. They include maintenance costs, building services and utility bills.
7. Check the lease agreement with your business landlord to determine if you are liable for rental of the building even if it is demolished during a loss-making event. If so, estimate the rentals over the indemnity period.
8. Calculate expected payroll for staff who will not be employed during the indemnity period. This includes the sum of wage costs, employee benefits and workers compensation insurance. Add this figure to the saved expenses.
9. Add the figures for gross profits and, if applicable, moving costs and continuing rentals. Deduct the expected saved expenses from this figure. This is the sum needed for business interruption coverage, which you should purchase from your selected insurance provider.
Key factors you’ll need to understand
Understand that for the purposes of Business interruption insurance, the gross profit calculation differs to that you might find in accounting. While in accountancy gross profit is understood to be sales minus cost of production, most business interruption policies will follow the following calculation for gross profit.
When calculating business interruption sums insured on an annual basis they must be increased accordingly if an indemnity period greater than 12 months is selected. In most circumstances, a minimum indemnity period of 24 months should be considered for SMEs to take into account site clearance, design and planning applications, rebuild time, replacement of plant and machinery, sourcing stock and rebuilding the customer and supplier base.
Uninsured Working Expenses
Uninsured working expenses are costs or specified expenses that vary directly with the level of trading, i.e. they will decrease in direct proportion to the turnover in the event of a business interruption. As these costs will no longer be incurred as the turnover reduces, there is no need to reimburse them, as such they are called ‘uninsured’ working expenses. One major uninsured working expense for a small business would be purchases such as components, raw materials and goods for re-sale. Other uninsured working expenses could also include: postage and packaging costs and commissions owed.
What Are Optional Extensions With Business Interruption Insurance?
When it comes to Business Interruption Insurance, a standard policy will usually only cover losses as a result of your own premises and property, but not that of your suppliers or customers, if applicable. However, your business may be affected by such damage and therefore it’s always worth considering these extensions when it comes to choosing your policy:
- Losses resulting from damage at the premises of your suppliers.
- Losses resulting from damage at the premises of named customers.
- Losses resulting from damage to your property while in transit.
- Losses resulting from access to an insured premises being prevented due to damage to nearby premises.
- Losses resulting from damage at the premises of a public utility.
- Losses due to the occurrence of a disease, vermin, defective sanitary arrangements, murder and suicide.
Life is full of unexpected twists and turns, but you shouldn’t have to suffer because of it. To learn more about what our Business Interruption covers, please don’t hesitate to get in touch with us today.
What Are Typical Business Interruption Exclusions?
Though each policy differs, typical exclusions to be aware of with any Business Insurance policy include:
- Riots or civil commotions.
- Risk of war.
- Radioactive contamination/explosive nuclear assemblies.
- Pollution or contamination.
- Changes in temperature, wind or rain damage to movable property.
- Risks related to motor vehicles, watercraft, aircraft, livestock or buildings in the process of being built.
Think your business could benefit from a Business Interruption policy? Wondering what else it could cover? Then please don’t hesitate and get in touch with our specialist insurance experts today who can provide you with a range of competitive quotes. We have partnerships with a whole host of top-rated UK insurers, so we’re sure we can find the right policy for you.
The Insurance Act 2015
Importance of getting your sums right
Calculate Business Interruption Insurance
Calculate sum of buildings cover
Calculate stock and contents
How much are your business equipment, Plant and tools really worth?