The purpose of business interruption insurance is to place the insured organisation in the same financial position, in terms of trading, as would have been the case prior to the loss occurring.
Without business interruption insurance major loss or damage often leads to the enforced winding up of a business.
The three main items insured under a Business Interruption policy are:
- Gross profit
- Additional increased costs of working
- Claim preparation costs
Gross profit is the amount by which the sum of the turnover (operating revenue / cashflow) and the closing stock exceeds the sum of the opening stock and the uninsured working expenses (an example being purchases because they are directly variable with a reduction in turnover i.e. if an organisation is not trading then the purchases will cease). A simple calculation sheet is available from Marsh to help you calculate your gross profit.
Additional increased costs of working are costs incurred following loss or damage to avoid a reduction in turnover and to maintain normal operation of the organisation.
Claim preparation costs are costs reasonably incurred by the organisation for assessing and preparing any valid claim under the Material Damage and Business Interruption insurance in respect of loss resulting from loss or damage.
The other key component is the indemnity period. This is the period of insurance protection and typically the period can range from three months to 24 months. It commences from the date of the loss or damage and expires when the organisation’s turnover is back to pre loss levels or the indemnity period chosen has expired, whichever has occurred first.
The indemnity period is chosen by the organisation. Factors to consider are:
- Buildings – are alternative premises readily available?
- Machinery – timeframe to repair/replace?
- Stock – easily sourced?
- Records – can these be replaced?
- Market share – what will the competition do?
Other items that can be insured under a Business Interruption policy are:
- Severance and redundancy payments
- Book debts
- Fines or damages
- Redeployment costs
- Salaries / wages
Business interruption is one of the most complex areas of insurance. Should you have any queries it is wise to run them past your Marsh Client Executive to help avoid any pitfalls or false expectations.