If you are unfortunate enough to have experienced a serious fire, flood, explosion, act of vandalism or any other insured loss damaging your buildings, contents and stock, you will know that settlement of your insurance claim for these items does not guarantee the financial security or recovery of your business. Immediately after this loss, you may be in a position where:
- You cannot open your premises for business fully
- You cannot fulfil outstanding orders and begin work on new orders
- You may have to wait for specialist machinery to be replaced
- You incur additional labour / suppliers costs to satisfy existing orders
Yet during this time you still have to continue to meet fixed expenses such as wages, rent, rates, bank interest and a multitude of other costs. These can all stress a business.
Business Interruption Insurance can de-stress this situation, arranging payments on account to help your business carry on through this difficult time and plugging the financial gap until your business is hopefully back to the same financial position as it was just prior to the loss.
The importance of setting the right Sum Insured
You need to get two very important elements right to ensure this cover pays out the amount you need to keep trading during the period after a significant loss.
This is the time you estimate it will take your business to recover back to the trading position it was in just prior to the loss. Do not under-estimate this period. Most insurers recommend a minimum of 12 months, but we believe it needs more sensitive attention as each business is unique.
Here are some of the questions you should ask yourself:
- If we need replacement machinery does it have a long lead time?
- Will our customers “stay with us” throughout this downtime – how long would it take to win them back or replace them ?
- Will I have access to additional labour to satisfy existing orders?
- If our premises are destroyed or badly damaged, will the Local Authorities request new planning applications and insist we comply with current regulations that require complex building materials during the rebuild programme?
Gross Profit Sum Insured
This is seldom examined in detail. Very often it is based upon your last audited accounts using a simple Gross Profit formula provided by accountants (which can differ from the definition used by your insurer). Often the following
- Correct analysis of Turnover generated from site or work away activities
- Correct interpretation of Costs of Sales
- Correct analysis of all wages and directors remuneration
- Examination of Variable Expenses
- Growth forecasts for the period after a loss until normal trade has resumed
When calculating your Gross Profit sum Insured you should consider all these factors and make the process an integral part of your Business Continuity Plan.