Business Interruption (BI) is something most business owners prefer not to think about, and often something they hope they’ll never need. However, in reality, just like a healthy individual still needs medical aid, businesses need to plan and protect themselves for the worst-case scenario.
This has become even more evident in the volatile times we live in, with sporadic natural disasters, increasing crime rates and a fragile economy.
Depending on your client’s business, there are three bases of cover. While it may not be as simple as simply considering the type of business or industry they operate in, you can upskill yourself to be able to provide your clients with accurate advice to help them choose the correct type of BI insurance.
Benefits of BI Insurance
BI insurance ensures that your clients have the necessary funds available after a devastating event to:
- Maintain their income stream while your doors are closed
- Pay additional and/or ongoing expenses
- Meet financial obligations to the bank, shareholders, and staff
Some of the main benefits clients can experience if they have the correct BI cover include:
If your client’s business is unable to operate, they will most likely not be able to pay their employees. Business interruption insurance can help clients avoid losing staff by ensuring they get paid and avoiding the need to recruit new staff.
In the event of a disruption, business interruption insurance provides coverage for income your client’s business would have earned if it had been operational.
Even if your clients’ business is not running and premises are unused, they are often still liable for rent, mortgage or loan payments. Business interruption insurance ensures that your client can meet their financial obligations while their business is out of action.
Disasters or devastating events can make your client’s main premises unusable, which means they will need to find a new temporary (or permanent) space.
Business interruption insurance can cover the expenses of moving their business to another location and may include both moving and rent costs.
Types of BI Cover Bases
This covers the loss of net profit, including standing charges and also any increased cost of working. In a nutshell, in order to calculate the insurable gross profit, your client will specify certain costs to deduct in order to arrive at their final insured sum. These deductions are known as variable costs or ‘uninsured working expenses’ (UWEs), and comprise costs that vary in direct proportion to the reduction in turnover.
Simply put, a gross revenue basis covers reduced turnover following a loss, including any increased cost of working. This basis is usually adopted by entities with very few UWEs.
The gross revenue sum insured is simply the total turnover of your client’s business for the length of the indemnity period.
This avoids many of the inherent pitfalls in the gross profit calculation where a gross profit basis would not bring any additional benefits.
Increased Cost of Working Only
Increased cost of working cover is included within both the gross profit and gross revenue bases. However, some clients may prefer to use it on a stand-alone basis, where the costs will not be subject to an economic limit. Increased cost of working will cover reasonable additional expenses incurred to assist your client’s business in recovering following a loss.
Business interruption insurance is designed to give your clients’ businesses access to the assets they need when they need it most.
If you would like to provide your clients with advice on BI insurance or to learn more about the topic and products available, get in touch with us and we'll introduce you to the independent Forensic Accountants at Elaine Clarke & Associates, who can help you navigate BI for your clients, as well as give you useful tools and guidance to improve your own service offering.