Navigating business interruption insurance in uncertain times

Global events, such as the COVID-19 pandemic and the ongoing Russia-Ukraine conflict, have caused significant economic disruptions across various sectors.  These challenges, including volatility in supply chains, rising labour costs, and inflation, have prompted businesses to reconsider their risk management strategies, including their approach to insurance. In particular their business interruption (BI) insurance. Companies might need to reassess the values covered under BI insurance and consider extending indemnity periods.  For example, if an insured event severely damages your premises, will it take longer to repair due to supply chain issues and labour issues affecting the building sector? Such delays are likely to directly affect your business operations and highlight the importance of adequate BI insurance.

The importance of business interruption insurance

BI insurance plays a crucial role in any comprehensive risk management plan. It provides coverage for lost revenues and the extra costs incurred if the business is forced to halt services temporarily due to an unforeseen insured event, such as a fire or weather-related incident like storm or high winds.

BI insurance is tied to property damage claims. Where the insured property is affected by events like flooding or fire, the financial and operational consequences of such disruptions can be devastating, making BI insurance essential for business continuity.

Key benefits of BI insurance

• Revenue protection: BI insurance protects your revenue during periods of disruption, helping you maintain cash flow, pay employees, and meet financial obligations while operations are paused.
• Surviving a crisis: Unforeseen events often require additional, unplanned expenses to keep the business running, coverage for these extra costs (known as additional increased costs of working) is a valuable addition to a BI policy.
• Maintaining competitiveness: With BI insurance, the home or business can resume operations more quickly, minimising downtime and reducing the risk of service users or others moving to other providers.

Working with a broker that understands your business

While BI insurance is crucial, its effectiveness depends on how well it is tailored to your business needs, consulting with a care providers insurance expert can help you assess risks and optimise your coverage. Key strategies include:

• Accurate risk assessment: Conduct a thorough risk assessment to identify potential vulnerabilities in your supply chain, key assets, and critical functions. Understanding these risks helps in selecting appropriate coverage.
• Verify Revenue Values: Ensure that the revenue you declare to your insurer aligns with the policy definitions. For instance, care homes often insure 100% of their revenues. However, in the event of a claim, the policy will not cover costs that are not incurred when operations are reduced, such as heating, lighting, laundry, and food expenses if the home loses some or all of its residents. These costs typically amount to 10-15% and should be excluded from revenue calculations for insurance purposes.
• Choose an adequate indemnity period: The indemnity period, or the time allowed to recover revenue losses, is a critical decision. It should be long enough to enable full recovery, including repair or rebuilding, securing planning permission if relevant, and filling empty beds with residents. The appropriate duration varies by Home, but it must consider factors such as equipment replacement lead times and potential regulatory investigations.
• Ensure accurate valuations: Make sure insured property and asset values reflect their true replacement or repair costs. Underinsurance can lead to insufficient coverage, while over insurance increases premiums without additional benefit
• Consider extra expense coverage: Adding "additional increased costs of working" cover to your BI policy provides reimbursement for reasonable extra expenses aimed at quickly restoring operations and reducing disruption.
• Review and adjust coverage: Regularly update your BI coverage to reflect changes in your business, such as adding additional beds to your home, increasing fees.  Keeping your insurance in line with your evolving operations is crucial for continued protection.

What you need to remember

The regular review of financial projections and potential risks, alongside guidance from an experienced insurance broker, can help ensure businesses have appropriate coverage for their operations.

• Review your current BI insurance policy to ensure it fits your business needs.
• Identify potential BI risks and assess their impact.
• Consult with an insurance broker to create tailored BI coverage.
• Ensure the values declared to insurers are accurate, particularly revenue figures that align with policy definitions.
• Consider the benefits of longer indemnity periods for greater protection in case of prolonged disruption.

While broader coverage and longer indemnity periods may lead to higher premiums, they provide better protection during unexpected events, helping businesses recover more effectively.