Business Interruption Insurance
Business interruption insurance allows you to keep on making money if disaster strikes.
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If you need to shut down or scale back for a week, month or even longer, business interruption insurance can help. It can cover you for loss of income, the increased costs of operating, and pay for wages and rent if a catastrophic event occurs. You'll find it in many comprehensive policies or as an add-on — we've listed those providers for you below.
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What is business interruption insurance?
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.
What does business interruption insurance cover?
Business interruption insurance can cover you for
- Lost revenue
- Ongoing operating expenses, such as rent
- Increased operating costs needed to maintain normal revenue
- Increased operating costs not related to revenue
- Professional fees to organise your insurance claim
- Outstanding debts you can't recover due to damage to your debt records
Keep in mind, you'll only be reimbursed if those things happen because of an insured event, which can include:
- An outbreak of an infectious disease within a certain distance of your premises
- A murder or suicide at your premises
- A shark or crocodile attack within a certain distance of your premises
- Closure by government authority, including street closures and curfews
- Loss or damage to your property including fire, natural disasters like earthquakes, storms, floods, explosions and theft
- Loss or damage to other property affecting your business (e.g. if the loss or damage happens to someone else's property and it directly affects your business, but only so long as the loss or damage occurs as a result of one of the insured events listed in your policy)
Does your business need it?
Here are some reasons you might need business interruption insurance:
- You pay a lot in rent. Some bills like rent and loan repayments will keep coming even if your business isn't operating. You'll need a way to pay them if a disaster causes you to shut down.
- You carry a lot of stock. If your stock gets damaged, it could take a while for you to replace it.
- You have a physical shop. If you have a physical shop and have to close down, business interruption insurance will cover your lost revenue. Even if you have other ways to sell your product, such as through a website, a business interruption insurance policy will pay any increases in operating costs to keep your business running.
- You have employees. Business interruption insurance will allow you to continue paying your employees so that they don't quit and go somewhere else.
- You rely on specialised equipment. If your equipment is destroyed and it takes a long time to have it replaced, business interruption insurance will help keep you going while you wait on replacements.
Business interruption insurance COVID-19
Your business might be able to claim business interruption insurance for pandemic-related closures, thanks to a recent NSW Court of Appeal ruling against insurers. While the decision is only binding to the two parties involved, it does open the door for many other businesses to submit a business interruption insurance claim.
Keep in mind that this doesn't guarantee success — there are still other conditions you'll need to meet, for instance, the closure needs to be by order of government authority — and just because one business one successful doesn't necessarily mean you will be. Nonetheless, if you already have business interruption insurance, it's worth speaking to your broker about submitting a claim.
Business interruption insurance claims examples
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:
How to calculate business interruption insurance cover
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:
- Estimate how much revenue you'll make over the next 12 months. 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.
- Identify how long it would take to rebuild. 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.
What does business interruption insurance not cover?
Every policy comes with exclusions and you'll find that you're generally not covered for the following with business interruption insurance:
- Undocumented income
- Voluntary closures
- Losses due to strikes
- The indemnity period has passed (e.g. the amount of time a policyholder has to claim the benefits of business interruption insurance)
- Losses due to breakdown in equipment or machinery
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