What is Business Interruption Insurance?
Any business may suffer significant losses due to an interruption caused by the following perils:
Unwarranted incidents like theft or vandalism etc.
Accidents like fire or mechanical damage etc.
Natural calamities/ disasters like Windstorm, Hailstorm, floods etc.
The adverse impact of such unlikely events on business like revenue loss and ongoing daily expenses etc. can be protected by opting for Business Interruption Insurance which will ensure uninterrupted income in case the business suffers an insurable loss thereby giving you a sense of security and confidence that all your business assets are adequately protected at all times.
Forms of Business Interruption Insurance Coverage
Named Perils Insurance
This type of insurance will ensure coverage against the named threats only and will NOT include any peril which is not listed in the insurance policy. For example, the Insurance policy with named perils of fire, theft & vandalism will cover risks associated with these threats only and will NOT provide damage/ loss cover in an unlikely event of business interruption due to flood & windstorm etc.
Broad Coverage Insurance
This type of insurance will ensure coverage against ALL threats except any specific Exclusion. For example, a Broad Form Insurance policy with exception of Electrical Fire will cover the loss of business due to damages caused by all threats/ perils but will not provide cover for business loss due to damages caused by an Electrical Fire.
Please note that Boiler and Machinery are excluded from both – Named Perils & Broad Form Insurance coverage as these equipment are potentially at high risk for Mechanical Breakdown, Electrical Fire, Explosion etc. However, these may be additionally purchased and extended to any form of the existing insurance.
Types of Business Interruption Insurance Coverage
There are basically three types of Business Interruption Insurance Coverage namely:
Gross Earnings Coverage
Coverage of Actual Loss Sustained (ALS)
Gross Earnings (or Limited) Coverage
This policy pays from the time of damage till such time the damage is repaired or the property is replaced. The policy stops paying as soon as the business resumes even if the business hasn’t regained the previous level of earnings. Though such limited form policy is less expensive than an extended policy, it may not provide adequate coverage for the business. For example, a business may not generate the same kind of revenue immediately after restarting as it was generating prior to shut down due to many factors like reduced market share due to competition or impaired production capacity due to new staff etc. ; however the insurance will stop paying from the day the business resumes.
There may be a limit on the on the amount of time the business is covered and the amount that the insurance will pay in a month. Such limit of Insurance may be determined using a specific worksheet. Based upon completion of the worksheet, there is a stated limit of coverage.
A recommendation is made to review Pre-Loss Production vs. Finished Goods/Selling Price of Inventory as Gross Earnings Form is intended for FUTURE production. If there is a loss of Stock or completed Inventory, the Selling Price should be reviewed and policy endorsed accordingly.
Profits (or Extended) Coverage
This type of policy continues to pay until the business resumes and regains its pre-interruption level of business in terms of revenue and profit subject to the maximum period of indemnity as listed in the policy. In our case, Recovery Time/Indemnity Period is from date of loss until the premises are open for business up to a year after date of claim or until business is back to its financial position prior date of loss – whichever is first. Limit of Insurance may be calculated using a specific worksheet.
Actual Loss Sustained (ALS) Coverage
Introduced in the 80’s; this coverage is intended to be a limitation “catch all” providing a broad coverage, increased/added extensions, “less work” to ensure justification and recovery of an insurable financial loss as it is intended to be as seamless as possible. The Recovery Time or Period of Indemnity may differ from insurance companies.
ALS will insure up to what may be verified. There is NO stated amount of insurance. Depending upon insurance provider, there may be limitations or additions/extensions.
Business Interruption Insurance Extensions
The following are a few extensions which may be added to or included with Gross Earnings, Profits or Actual Loss Sustained type of Insurance:
This type of coverage is intended to cover ONLY the extra costs/expenses required to run a business.
for KEY Staff for their wages/salaries. This will be influenced by availability of replacement staff, training and any potential legal requirements (i.e. Union)
Regardless of FORM used, Accounting will be needed to verify Claim. No Accountant will do this free of charge.
Loss of RENTAL revenue from a business that is driven by rent. Coverage is influenced by and follows FORM of the Property Insurance. Usually, GROSS RENT is insured, providing a recovery time of up to 12 months. This may be adjusted for an extended period of time.
SPECIAL NOTE: Builders may have a Business Interruption exposure as their construction could be interrupted by an insurable loss. Due to reconstruction, there may have loss of income due to delayed opening date. Extended Recovery Time may be purchased depending upon the needs and estimated time of recovery needed to bring the business back to the same financial position, at the time of loss.
Contingent Business Interruption Insurance
Form of Contributors linked Insurance – If a supplier of a particular item/article/component has an insurable loss and the concerned company is unable to provide raw material to our client, an indirect Business Interruption may occur to our client incurring a financial loss as our client may not be able to function/manufacture/sell due to unavailable item/article/component. Determining what is being provided, when, how much might be in current Inventory and the financial impact may be if an insurable loss occurs from a supplier is highly recommended for discussion.
Our client may suffer a financial loss if their product cannot be delivered because of their client’s insurable loss. Determining what is going where and how much will determine as to what is required to be included in the insurance.
Loss of Tuition
Loss of Revenue from a business that is Tuition or Registration driven. The Recovery Period is from DATE OF LOSS until premises are available for continuation of activity; however, a time extension is given within the wording to the next registration time if reopening is within a predetermined time period of registration time which is usually within 30 days before the opening day.
Commercial property insurance
This type of insurance refers to the insurance policies provided for property having a business use. In addition to providing the coverage for loss, damage and liability issues on the premises and contents, the business owners buy protection for the indirect loss of business costs associated with having to suspend operations while recovering from an incident.
Liability insurance provides protection when the policy holder is financially responsible for injury or damage they cause to others. Premiums from liability insurance represent the third major source of income to insurers.