Compare Business Interruption Insurance Policies
Business interruption insurance covers the loss of income a business suffers when it is unable to trade due to an unforeseen event. Floods, fires, earthquakes and storms can all interrupt usual business activity. The loss of money from this disruption can be quite significant but, even when in the midst of a disaster, costs and overheads still need to be paid.
When the flood crisis hit Queensland in early 2013, the nation watched on in shock as the sunshine state took a battering. But while the human cost of this disaster was undoubtedly tragic, the floods also had a devastating economic impact. Many businesses were forced to close their doors for days and even weeks, and regular trading completely shut down. Despite the widespread impact, however, Roy Morgan Research later revealed that only 14 per cent of the businesses affected had business interruption insurance.
Business interruption insurance protects you against financial loss in these situations and can help your business survive tough times. Whether you’re a small business owner or a large organisation, ensuring you have the right protective cover in place is a must.
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- What is Business Interruption Insurance?
- Do I Need Business Interruption Insurance?
- What types of events does business interruption insurance cover?
- What to look for when comparing Business Interruption policies
- Typical Business Interruption Insurance Exclusions
- Business Interruption Insurance Claims
- Business Interruption Insurance F.A.Qs
What is Business Interruption Insurance?
Your business insurance might cover your physical assets if you’re caught up in a major event like flooding or an earthquake, but what about the profits you may lose while your business is shut down as a result of the damage? This is where business interruption insurance comes in. It is designed to ensure the financial health returns to the same state it was in before the event.
Cover for immediate and consequential losses sustained
The basic premise is that when a major event or disaster occurs, sometimes your business cannot operate or will be forced to operate below full capacity. Not only will this result in a loss in profit, but you will still have to pay regular costs like rent, salaries and utilities. In some cases, renovation and re-building work may even have to be done before your business can get back on its feet.
Business interruption insurance helps pay ongoing costs while you rebuild. It can help you retain key staff during an interruption, and can cover you if there’s an increased cost involved in resuming your business operations at an alternative location.
Bundled with other types of business cover
This type of insurance is not sold as a separate policy, but instead added on to a property policy or included in a comprehensive policy. But despite its several merits, various studies have shown that many businesses do not have business interruption insurance. Sadly, many companies fail to survive the damage done to their financial position when disaster strikes and they are not covered.
It’s impossible to predict the future, but if you act now to make sure you have the right coverage to protect your business against interruption and loss, you can ensure that your business has a safe and secure future.Back to top
Do I Need Business Interruption Insurance?
Despite the fact that it is often overlooked, business interruption insurance can be vital to ensuring your business survives during tough times. Unless you have a significant amount of cash and can afford to fund the recovery of your business, this type of insurance can help your business rebuild to its full strength after a major event.
Most people wouldn’t even consider opening a business without insurance against damage from fire or storms, so it makes sense to invest in business interruption insurance cover as well.
There are so many different circumstances which can interrupt your business, and the time taken to resume normal trading can cause significant financial damage. Wages, rent and utilities still need to be paid, you may need to rebuild or even move premises, and all the while you could be losing out to your competitors.
Resuming your business as quickly as possible after a disaster is essential, and business interruption insurance is the best tool available to help you maintain your company’s financial position in difficult circumstances.
Key questions to ask when deciding if you need business interruption insurance
- In the event that your business was to suffer a major loss that caused extensive damage to the premises and machinery, would you have the capital to cover ongoing expenses while the damaged property is repaired or replaced?
- How much capital do you think you would need to support your business over this period? Bear in mind the period could last for at least 6 months
- Would you suffer a loss in capital if you were unable to satisfy the needs of your customers to extent that you had done before?
- Would you have any loan repayments to make during this period of downtime? i.e. property or machinery rent
- How long do you think it would take to repair damage to your property and resource new stock to maintain output to customer base?
- How long do you think it would take to receive a benefit payment from your insurer? Consider the investigations that might be required by the insurer to verify the eligibility of your claim. It is not unusual for this process to take up to 3 months.
- How would you staff be impacted?
- Would you require staff to provide assistance as your business recovers?
- Would you be able to keep on top of their wages?
- Would you be able to fund the retrenchment process? This might include outstanding annual leave and long service leave entitlements
Business Interruption Insurance Calculation: Working out how much Business Interruption Insurance You Need
Most insurers will follow the same method when calculating an appropriate level of business expenses cover. Essentially, this is found by determining the sum of the Turnover, Closing Stock and Work in Progress, less the sum of Closing Stock and Work in Progress. An insurance consultant can help you determine this amount so that you can ensure you are not underinsured in the event of a loss.
Example business interruption claim
|Expected turnover (usually based on previous years earning)||$250,000|
|Less: Actual turnover||$40,000|
|Reduction in turnover||$210,000|
|Cost of sales - 40%||$84,000|
|Loss of gross profit||$126,000|
|Plus additional costs incurred:||$30,000|
|Less any savings made: Rent on damaged premises||$45,000|
|Plus claim preparation costs (legal and accountant fees)||$7,000|
*Example prices are correct as of May 2014 and subject to change.
What Types of Events Does Business Interruption Insurance Cover?
Events such as fires, storms, earthquakes and floods typically give rise to business interruption insurance claims. If your business cannot operate because of the damage to your business property, interruption insurance kicks in. Please note that the damage must occur at the business property specified in your policy — if access to your business is restricted because of damage at a nearby or neighbouring property, your policy may not include cover.
Coverage will obviously differ from policy to policy, but below is an outline of the features commonly covered by business interruption insurance:
- Loss of profit. Business interruption insurance will cover the difference between your normal business income and the income earned during any shutdown period.
- Increased cost of working. Increased or additional costs may be necessary to attempt to keep your business running, and business interruption insurance will help cover these expenses.
- Relocation costs. If your business property is damaged, you may have to relocate to new premises in order to continue trading. You can be compensated for these costs, as well as for money spent to advertise your temporary location to clients or customers.
- Paying overtime and hiring temporary staff. This may be necessary to help your business get back on its feet, and your business interruption insurance policy may assist with this.
- Wages. Would you still be able to afford to pay your employees if your business is temporarily shut down or not running at full capacity? Your policy can help cover these costs so you can pay your employees and retain key personnel.
- Rent, utilities etc. Regular business expenses will still need to be paid, even if your business is not trading as normal. Business interruption insurance can cover these costs.
- Gross rentals. If you’re a landlord, this insurance may cover loss of gross rentals incurred during a shutdown caused by a major event.
- Coverage begins from the time of the shutdown and continues until your business is back up and running at the level it was before the interruption.
What to look for when comparing Business Interruption policies
There are a number of policy features people should look for when taking out business interruption insurance.
- Cover requirements:Before you start searching for a policy, assess the insurance needs of your business. What are the risks your business faces that could cause a significant interruption? How big a financial impact would it be if your business were closed for a certain period of time? What sort of ongoing costs would you continue to have to take care of in order to keep your business afloat? Once you’ve answered these questions you can determine how much business interruption cover you need.
- Compare options:You can then begin to compare a range of policies. Read policy documents closely to find out exactly what is and isn’t covered under each policy. Does one feature a higher benefit limit than other policies? Does the policy provide coverage for the risks your business regularly faces? Compare policies at finder.com.au to get a good idea of the cover options out there.
- Compare quotes:Next, get quotes from a number of insurers for comparison purposes. Don’t simply be sucked in by the cheapest quote—compare the level of cover this includes to get a true picture of how much a policy is worth.
- Speak with a broker:Finally, for many business it’s a good idea to enlist the help of an insurance broker. A broker can assess the insurance risks facing your business and then present you with a range of business interruption insurance policies. A broker works in your best interests and will help you find the right policy for your situation.
Be aware that business interruption insurance does not cover everything and exclusions do apply. Examples of common exclusions include things such as:
- Computer viruses
- Damage caused by moisture penetration or seepage
- Damage caused by wear and tear
- Theft by one of your employees
- Damage to property or goods caused by faulty design or workmanship
- Loss of utilities (for example after a cyclone or major storm)
- Damage caused by war or terrorism
- Loss of market i.e. if population evacuates following disaster
- Deliberate acts that are carried out by you or any other person acting on your behalf
- Dishonest acts or embezzling insured damage
- Loss of electronic data
- Loss by restrictions on reconstruction or repair that have been imposed by a public authority
- Not having enough capital to recommence repairing of lost/damaged property
- Loss or damage caused by radioactive contamination
- Loss of business as a result of suspension, cancellation of property lease, licence or order
- Loss or damage to equipment that has not been included in the schedule of insurance
As always, make sure to read the fine print and discuss policies with your provider so you know exactly what is and isn’t covered by your policy.Back to top
Business Interruption Insurance Claims
Preparation is key when it comes to risk management, and taking a few simple and sensible steps can help make the process much easier. Make sure your employees are planned in proper reporting procedures to document any damage, and use digital cameras to get photographic evidence to support your claim. It’s also vital to report incidents like fires, thefts or accidents in a timely manner to make sure you will be covered.
To make a claim, you’ll have to fill out a claim form for your insurer. When preparing the claim, communicate regularly and positively with your insurance company to ensure the process runs as smoothly as possible. Some policies will even cover the cost for you to hire an external claims consultant to manage your claim. Channel all communications with your insurance provider through a single representative for your company.
Once your claim has been lodged, you’ll need to provide evidence of your reduction in income or increased costs of working to your insurer. Documentation is key to the success of your claim, so taking care to keep your files and finances in order throughout the year can really come in handy if disaster strikes.
Insureds responsibilities in the event of a claim
- Do everything in their power to minimise losses incurred to the business
- Inform the insurer of any other types of cover that they have in place
- Not make any false statements related to the claim
Steps to make a claim
- Inform the insurer (usually in writing) immediately of the damage that has been suffered
- Download claim form from insurers website and return to insurer as soon as possible
- Give insurer access to review damage that has been suffered
- Provide any further evidence or information that may be required by the insurer
Evidence that may be required by insurer
- Account books
- Business books
- Balance sheets
- Any other evidence that insurer may require to verify claim
Other typical conditions for benefit payment
- Business owner must make not of the sale of any property to other parties during the indemnity period
- No benefit will be paid from the moment the business owner decides to discontinue their business following a loss
- Insurer may decide to provide benefit payment in instalments following a successful claim
- Insurer will deduct applicable excess from the claim following inspection of loss that has been suffered
Business Interruption Insurance F.A.Qs
Q. How do I determine how much business insurance I need?
- A. There are no concrete rules to determine exactly how much business interruption insurance cover you will need, as there are so many factors that can affect the individual risk to your business. Speak with your insurance adviser to make sure you are getting the right amount and the right type of coverage.
Q. How long should I take out business insurance for?
- A. When purchasing business interruption insurance, it’s vital that you select the right indemnity period for your company. The indemnity period is the amount of time you believe it will take your business to fully recover following damage. Not only will you need to consider the time it will take to rebuild and resume normal business, but also how long it will take to win back customers and restore your business to its former financial state. It’s generally wise to choose a larger indemnity period rather than going for the cheaper option of a short indemnity period, but it’s best to discuss what’s best for you with your insurance adviser.
Q. What triggers a business interruption insurance claim?
- A. It’s vital to remember that your cover will only apply if the damage your business suffers is caused by an event you are insured for. For example, if you’re not covered for floods and that is the reason for your profit loss, your business interruption insurance won’t be able to help you out.
Q. Is it worth bringing in an expert to help with my claim?
- A. Depending on the size of your claim, it can be a wise idea to employ an external claims consultant to help ensure you have the best chance of a possible result. Insurance companies have a wealth of experts with an in-depth knowledge of this sort of work, whereas most small business owners have little experience in documenting and negotiation business interruption insurance claims.
Q. What else can I do to help resolve my claim?
- A. There are several steps you can take to help ensure the quick and satisfactory processing of your claim. Maintain regular contact with your insurer, keep accurate records of sales and expenses that occur during a shutdown, and make your accountant available whenever possible. You should also take the necessary steps to minimise your company’s loss, for example continuing partial operations, renting a temporary business property, or even outsourcing some work to other companies.
* The offers compared on this page are chosen from a range of products finder.com.au has access to track details from and is not representative of all the products available in the market. Products are displayed in no particular order or ranking. The use of terms 'Best' and 'Top' are not product ratings and are subject to our disclaimer. You should consider seeking independent financial advice and consider your personal financial circumstances when comparing products.