Business interruption cover can help your business recover from an incident such as a fire, a flood, or a break-in.
Yet it is one thing to have a business interruption policy in place. It is just as important to ensure that your business interruption insurance will give you the cover you need should you ever make a claim on your policy.
According to one report by the Chartered Institute of Loss Adjusters, around 40% of businesses with business interruption policies are underinsured. This means that their policy would not stretch to cover all their expenses if they ever needed to make a claim.
In this post we will explore how you can calculate your business interruption cover to ensure you will have the cover you need when you need it most.
What is Business Interruption Insurance?
Following an unexpected event, such as fire, flood, or theft, you may be forced to temporarily halt or modify your business operations. In this case, business interruption insurance can cover your overheads for as long as it takes for your business to recover.
A good business interruption insurance policy should give you enough cover to restore your business to the exact position it was in before the incident took place. Plus, the policy should provide enough to cover your business throughout the entire recovery period, even if it takes years.
What Does Business Interruption Insurance Cover?
- Loss of Gross Profits – Business interruption insurance may cover for loss of gross profit, which will cover your business’s net profit loss following an insured event. This type of cover is most suitable for businesses with multiple variable costs.
- Loss of Revenue – Alternatively, a business interruption insurance policy may cover for loss of revenue, meaning it will cover your loss of turnover or income following an event. This form of cover is more suitable for businesses with more fixed costs, which must be paid regardless of whether the business is operational.
- Increased Cost of Working (ICOW) – This is cover for any extra investments you may need to make in order to continue operating as normal following an unexpected event. This might include cover for renting alternative working spaces, for hiring temporary staff, and for acquiring new stock or equipment.
How to Calculate Business Interruption Cover
There are two key things to consider when calculating your business interruption cover:
- Sum Insured – This is essentially the settlement you would get if you made a claim on your policy. As we outlined above, your sum insured may be based on your loss of profits, your loss of revenue, or your increased cost of working.
- Maximum Indemnity Period – This is the maximum period for which your business interruption insurance policy will cover you. Think of it as an estimate of the time it would take your business to fully recover from the unplanned event.
How to Calculate Your Sum Insured
Depending on the nature of your business, your sum insured may be based on:
- Your loss of gross profits or your loss of revenue
- Your increased cost of working
When it comes to calculating your gross profit or your annual turnover, it is not enough to simply look at figures from previous years. You should also consider possible future trends, along with the potential impact of inflation.
Whether you are calculating your gross profit or your gross revenue, you should always factor in ongoing expenses such as:
- Purchases
- Utility costs
- Staff wages
While accountants may deduct these expenses when calculating gross profit, your business interruption insurance will need to cover you for these expenses, and more.
When calculating your increased cost of working, as well as calculating any additional costs your business may incur, such as through renting alternative premises or hiring temporary staff, you might also consider how you might save on certain expenses throughout your recovery. For instance, if your employees are able to temporarily work from home, you could make savings on ongoing operational costs such as utilities.
How to Calculate Your Maximum Indemnity Period
One of the most common mistakes businesses make when calculating their business interruption cover is in underestimating just how long it would take their business to recover from an unplanned event such as a fire or a flood.
In a business interruption insurance policy, the maximum indemnity period is a hard line: Once you reach your policy’s maximum indemnity period limit, you will cease to receive any further claim payments, even if you have not yet received the maximum amount of your sum insured.
It will likely take you much longer than you think to recover from an event, and you will need your business interruption insurance to cover you for the entirety of your recovery period. So, you should aim to make the maximum indemnity period as long as possible.
Some insurers offer a 12 month indemnity period as standard. But others have started to offer a 24 month indemnity period as standard, so as to help businesses avoid a common underinsurance trap.
We Can Help You Calculate Your Business Interruption Cover
An insurance broker can help you determine what kind of business interruption policy is right for you, based on how your business operates, whether this is a loss of gross profit policy, a loss of revenue policy, or a dedicated ICOW policy. They can then help you calculate your sum insured, based on your past and projected profits and revenue, along with any extra costs or contingencies you may need to consider.
James Hallam is an independent Lloyd’s broker with a dedicated team of experienced insurance professionals who are committed to getting you the cover you need at a price you can afford. We can help you get tailored business interruption insurance while avoiding some common underinsurance pitfalls, so that you will have all the cover you need when you need it most.