Business Interruption – are you insured for long enough?

Are you insured for long enough?

The right Business Interruption cover can mean the difference between getting back up and running and going out of business if you’re unfortunate enough to suffer a major incident.

Whilst many businesses purchase this insurance, they often don’t buy enough cover which can lead to being underinsured. This means that the insurance won’t protect a business throughout the full cycle of a claim, leaving businesses high and dry when cover is needed most.

To explain this further, the purpose of Business Interruption cover is to maintain the turnover of the business following an insured incident. Cover is limited by time, referred to as the Indemnity Period, as well as by the Sum Insured. The Indemnity Period starts on the day of the insured incident. It will end when:

• the business has made a full recovery to where it would have been if the incident hadn’t happened, or
• the day the indemnity period ends, whichever comes first.

So, if the indemnity period is too short, cover will end before the business is back up and running and the operator will be left to face the rest of the recovery without any financial support from insurance cover.

Growth trends should be factored into the equation when calculating the Sum insured. With a 24- or 36-month indemnity period, it is possible that the insurance could provide support three to four years from the policy start date should a claim occur on the last day of the policy term. Consequently, future growth should be considered when putting forward a sum insured to ensure the adequacy of coverage.

Let’s take a look at some of the common timescales following an incident:

• Three months – Following a major incident, for example a large fire, insurers will carry out a forensic investigation to establish the cause before cover can be confirmed and any work can start to reinstate buildings etc. To make the building safe, gain access and conclude this initial report can take an average of three months.
• Six months – Any significant work on the premises will need planning permission.  The average time to obtain this, including time for plans to be drawn up, is six months.
• Nine months – After the incident, it’s likely that work can start on repairing or rebuilding the premises. Whist the recovery operation may have been able to continue on a whole or part basis, any building repairs, manufacturing, sales or other activity may not have been possible unless alternative premises have been found on a short-term basis in the local area.
• 15 months – A rebuild of premises could take six months, meaning the operator can begin to kit out premises around 15 months post-incident.
• 16 months – Provided that machinery lost in the initial incident has been ordered and has arrived, six weeks should be allowed for fitout and commissioning.

Whilst business can resume as usual, it can take a business many additional months to fully recover to the position they were in before the incident occurred.

Remember, Business Interruption insurance can provide cover for Loss of Gross Profit until that Gross Profit is no longer affected by the incident – the cover does not stop the moment the premises is reinstated.

Our recommendation:

12 months’ cover is never enough.  At Howden we always recommend a minimum of 24 months, but proper consideration needs to be given to how long it would take for your business to recover.