Business interruption – or BI – insurance is one of the largest areas of concern in the SME sector in Northern Ireland. According to the chartered institute of loss adjusters, it is estimated that around 40% of businesses are either underinsured or indeed have no business interruption insurance in place. Considering that the absence of business interruption insurance is often cited as the major cause for insolvency following serious physical property damage, it does not paint a comforting picture for some businesses who have neglected to purchase this cover.
Most commonly, business interruption presents itself in the form of a fire, flood, explosion, disruption from technical issues or human error. It could be suggested that it is simply down to a misunderstanding of what it is, what it does, and how it is triggered that this important cover is often unprioritised. BI insurance provides cover for the earning capacity of the business following an insured event which disrupts normal business activities. It is a policy of indemnity, in that it seeks to ensure that the insured achieves the same level of profit that it would have earned had the loss not occurred. This ensures the business can continue to operate despite loss or damage to its capital assets.
It is very important for businesses and organisations to calculate the correct sum to be insured under a BI policy and the correct indemnity period. This can be difficult but it is extremely important and worth speaking to your broker for some assistance as well as seeking the support of a broker who makes it their business to understand how your organisation and industry operate.
Underestimating the sum insured could lead to a significant financial shortfall following a business interruption event, leaving a business owner out of pocket. Businesses may also want to consider any increased cost of working to be factored in including additional costs incurred to help the business’s recovery following a loss. Examples of these costs include rent of alternative premises, utility bills, staff wages or additional marketing or advertising activities. Businesses owners can start by asking themselves, “What types of threats could my business face?” and “Could my business continue to operate in the event of a serious disruption?”
In addition to financial implications, there are other repercussions following a business interruption event to be considered. Prolonged closure of a business could result in customers going elsewhere and advocating other brands, in turn damaging the company’s reputation and existing client or customer base. Employees who find themselves out of work for a sustained period of time may also have to seek alternative employment resulting in significant recruitment and training costs for new staff when business resumes.
In the worst-case scenario, a business may never reopen or could remain closed for months. The average period of ‘down time’ for a small business is more than three to five months, representing a significant cost in terms of lost revenue and profit, plus the expense of any bank loans required for repairs. By cutting corners in purchasing adequate BI cover, a business owner could fail to see the bigger picture and neglect to take all expenditure into account.
A robust continuity plan, which works hand-in-hand with business interruption insurance should be implemented by local businesses to provide reassurance for the business, its suppliers and customers. Accurately assessed BI insurance can prove instrumental in the case of a disaster, providing much-needed financial assistance to get a business back on its feet.
For more information on how business interruption insurance can help your business contact Lockton’s Commercial Insurance Consultants Kieran Hurley, [email protected] or Brian Mullen [email protected]