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Business Interruption Insurance

How can business interruption insurance help protect your greatest asset?

For any small business owner, knowing your business is protected, should the worst happen is probably fairly high on your list of priorities. Any business can subject to a disruption to operations, whether it’s a natural or man-made disaster but knowing how to adequately prepare for this can be tricky.

We’ve previously talked about the importance of a good disaster recovery plan, as one method of preparing your business for unexpected turns - having a good business insurance policy is another.

Figuring out insurance can be a minefield for business owners, but it’s such an important thing to get right. Small business is key to the British economy, so having the right information can be a huge help.

What is BI?

Business Interruption (BI) is a specific type of cover designed to protect you and your business if a disaster or event means you’re not able to operate normally.

Sometimes, business owners overlook this as an essential product. A 2014 Aviva study* found that at least a fifth of medium-sized businesses had experienced some form of business disruption, so it’s important to have a specific insurance arrangement in place. It is often available as part of your business insurance policy.

BI protects the profits and cash flow of your business and the idea is it means you would be in the same position after an incident that you’d be if the incident hadn’t taken place. It has to be set to cover a specific period of time, known as a maximum indemnity period. This is the amount of time you calculate it will take your business to recover after an incident has occurred.

The basis of a BI cover may vary e.g it may cover the gross profit of the business, or what’s known as the increased costs of working (ICOW) such as renting an alternative site. Take a minute to look at your insurance policy to check your cover, if you have any questions your Insurance Broker will be able to help.

Under-insurance

Under-insurance is when your policy doesn’t include sufficient cover to fully protect your business, i.e. the recorded value of your property is incorrect, and is a big issue for many companies when arranging insurance policies. The FCA found that 22% of business customers polled felt their business insurance was inadequate, while 39% only bought insurance because they required compulsory covers.

It’s easy to underestimate how much cover you may need, however, your insurer can help to ensure you have what you need. You could be left in a poor position if it is not adequate. A further Chartered Institute of Loss Adjusters (CILA) survey found that when it comes to BI, 67% had 12 months or less set as an indemnity period. The estimated recovery period is 24 months, and BI works on the basis that if things are not where you’d expect them to be within the set period, the insurer is no longer responsible for covering the costs once it’s ended.

It’s not all doom and gloom though. Calculating accurate values for your assets, setting a realistic indemnity period and carefully considering what disasters you may need to be covered for, will all go a long way to giving you the peace of mind that your business is prepared. We work with insurers that actively take steps to address under-insurance at Make It Cheaper Financial Services.

BIBA outline a few steps you can take to prevent your business being both underinsured and underprepared for disasters.

  1. Creating a disaster recovery plan - it can help your business recover after a loss
  2. Consider using a professional valuation service – it can help you decide on the sums to insure
  3. Set a realistic indemnity period - remember, 24 months is considered the estimated amount of time it would take for a business to fully recover
  4. Check your documents – insurers will try to highlight the important conditions of your policy, particularly your schedule, statement of fact and policy wording. Nonetheless, it’s good practice to be thorough and ensure any amendments are communicated.
  5. Be aware of new risks – risks are ever evolving. Keep up to date with what could become a threat to your business and mitigate for this with your insurance policy

*https://www.aviva.co.uk/media-centre/story/17362/dont-interrupt-smes-leave-themselves-open-to-poten/

https://www.framfarmers.co.uk/uploaded/documents/Insurance/Business%20Interruption%20Insurance.pdf

http://www.jlt.com/specialty/our-insights/thought-leadership/food-and-agri/business-interruption-insurance-guide

http://www.jlt.com/specialty/our-insights/thought-leadership/food-and-agri/business-interruption-insurance-guide

http://www.london-bia.org/wp-content/uploads/2016/02/LBIABIManual.pdf

CII: Business Interruption Insurance made simple

https://view.publitas.com/biba/how-to-avoid-under-insurance/page/1

https://www.hiscox.co.uk/business-insurance/office-insurance/business-interruption-insurance