Business Interruption and the risks of underinsurance
The possibility of daily operations grinding to a halt as a result of an unforeseen event is one of the main vulnerabilities of any business. Incidents such as fires or flooding could potentially close a company’s doors for good. As a result, business interruption insurance is paramount for any company.
This according to Annelie Smith, Corporate Executive at RBS (Risk Benefit Solutions Pty Ltd), an authorised financial services provider, who states that many companies could be underinsured in the event of a business interruption as a result of a number of errors on the part of the business owner or broker.
“A business interruption (BI) policy’s primary goal is to protect the company’s income. It is vital to understand the difference between actual profits and insurable profits. This means that the business owner needs to take into account what he is required to declare from an insurance perspective, instead of just providing current profit values. It is also important to take into account the company’s projected profit growth when taking out a business interruption policy. If your business is projected to grow by 6% per year, then you need to ensure the business for its current value plus 6%, otherwise, you risk losing it if a fire or other business interruption event hits the business a year after you took out the policy. We always recommend that the business owner looks at the values as if a claim may occur at the last day of the insurance period,” Smith says.
“This, and a few other common mistakes is the reason that so many businesses cannot fully recover after an interruption event. It is ultimately the responsibility of the business owner to know which questions to ask and which boxes to tick, to ensure they do not put the business at risk,” she adds.
According to Smith, businesses also need to understand the importance of setting the right indemnity period. “Policyholders sometimes try to reduce their premiums by opting for a shorter indemnity period. In some cases, they simply underestimate how long it takes to restore the business. The indemnity period is the maximum length of time that the policy will support the business recovery costs after an interruption event. Calculating exactly how long it takes for a specific business to recover is a complicated process on its own, but as a rule of thumb we usually advise any company to be insured for a minimum of 12 months,” she says.
Finally, every business needs to know exactly what is covered by their business interruption policy. “Remember that there needs to be physical damage in order for a business to claim on a business interruption policy. All policies state clearly that the insured needs to mitigate risks and losses. Should a well-managed risk control system be in place, then it would assist the insurer to settle the claims more rapidly. This will allow the insurers, and the business needs to be able to prove that it did everything in its power to mitigate any possible risks. Fires, floods and other disasters that cause damage are fairly straightforward to claim for, but something like drought, which doesn’t cause direct damage, is not covered. Businesses that depend on water for their daily operations, therefore, need to hedge against that risk in some other way. The important thing is to know exactly which events can hurt your business, and whether policies explicitly cover them,” Smith says.
“Businesses need to stay up to date with new emerging risks as well as their own financial requirements. Importantly, they need to involve their broker partners at all levels of the business, to ensure that their business insurance policies and strategies can see them through difficult times,” Smith concludes.
