Business interruption insurance is a type of insurance that replaces lost income caused by a disaster or major event like a fire, flood or outbreak near your premises. It can keep your business afloat if disaster strikes and you're forced to temporarily close, scale back operations or operate at a higher cost.
For example, if a bushfire destroys your shop and most of your stock, it can provide protection for the loss of income, increased cost of operating your business, and pay for ongoing expenses, such as wages and rent.
If you want cover, you'll need to add business interruption insurance to your business insurance policy. It's usually available as an additional add on.
Here are some reasons you might need business interruption insurance:
To calculate how much business interruption insurance you should have, you'll need to work out how much revenue you expect to make over the next year, and then identify how long you would need to rebuild your business if the worst happened. Here's what to do:
You can start by looking at item G1 (total sales) on last year's Business Activity Statement. Then work out how much that will increase or decrease based on market trends and business performance.
Imagine the worst-case scenario for your business. How long would it take you to get back on your feet if you lost all your property including the building, stock and equipment? That's how many months of cover you would need. This is your indemnity period.
Give the insurer both of these figures, and they'll work out the rest when it comes time to claim. But basically, if you lose it all, they'll divide the figure from step one by the number of months in step two to arrive at your total lump sum payout (and they may even give you a little extra as a buffer). This is your limit of liability.
They'll add in extra cash for your increased expenses (such as money you'll need to spend on advertising when you're finally back in business) and may deduct money that you have saved as a result of being out of business (such as your electricity bill).
If you need help estimating next year's revenue, you can find business interruption worksheets online. Some brokers even offer online calculators that can help you.
Let's say you run a small bicycle shop and you anticipate revenues of $200,000 over the next 12 months. You also believe that if you were forced to close your doors, you could get fully back up and running after 6 months. So you take out a business interruption policy with a 6-month indemnity period based on revenues of $200,000. That means your limit of liability is $100,000
Your insurer has agreed to pay up to 120% of your limit of liability just in case your recent revenues were above your original estimate. So your max payout would be $120,000.
Well, the worst happens and a fire destroys your business, causing you to shut down for 7 months. In the 12 months prior to the fire, your revenues were $220,000.
Here's how it would play out:
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Sir / Madam
In above example of BI claim it is mentioned that-
Less any savings made: Rent on damaged premises
Why does only rent considered as a savings but any other expenses e.g. utilities.
Regards,
Guru
Hi Guru,
Thanks for your question. finder.com.au is a comparison service and not an insurer. The example used was very basic and only included rent. Savings may sometimes include maintenance costs, building services and utility bills but it will always depend on the policy.
I hope this was helpful,
Richard