In one week in the North, I heard of a terrible flood from a burst water pipe and the collapse of the face of a building from a vehicle accident. For each of them, I hoped they had business interruption insurance to help ease the financial burden of such a disaster.
It is critical to make insurance part of an organization’s crisis management plan. It can provide the funds to minimize the financial impact on the business of unexpected events and can help cover the costs of having outside professionals assist with claims preparation, and, most importantly, will allow management to focus on getting the business back on track following a crisis.
Insurance claims may be made for any number of reasons – perhaps loss of business income or property (e.g. fire, flood, etc.) – to recover losses from fraud or losses from other insured perils. The claims process is often complex, requires significant effort and requires careful and strategic use of appropriate resources. However, preparing a claim that is easily defended to your insurer can help businesses resume operations and realize the insurance recovery to which they are entitled under the policy!
Losses resulting from business interruption can be fairly minor, such as when there is a short electrical outage. On the other hand, they can be very significant when there is a complete shutdown of a manufacturing plant due to a fire or flood.
Business interruption insurance covers losses from incidents such as fire or flood where an organization stops operating for a period of time or at reduced capacity. Business interruption coverage may also be acquired that will cover indirect situations where, for example, a supplier or customer stops operating for various reasons causing losses to your company. There are two main types of business interruption insurance: either “Gross Earnings” or “Gross Profits.” In either case, it is important to note that Gross Earnings or Gross Profit calculated in accordance with the policy wording will be different from what would appear on an organization’s financial statements. As such, when buying a business interruption policy, it is important to be aware of this distinction and to properly assess what expenses will and will not be covered and for how long.
Most business interruption policies will include some “co-insurance” provision which results in the insured organization sharing a portion of the loss if the organization is considered underinsured. In addition, the time period for which the organization is covered (the indemnity period) will vary depending on the policy. In some cases, the indemnity period ends when the damaged property is repaired or replaced. This is typical wording in a Gross Earnings policy. In this case, losses that may continue after reconstruction but before the organization’s sales are back to normal pre-loss levels will not be covered. Under Gross Profits policies the insurance company would compensate the organization for losses until sales return to normal (usually to a maximum indemnity period of 12 months).
Expenses which are incurred by the organization to reduce the loss will normally be covered under a business interruption policy. Such expenses could include overtime wages incurred to prevent or reduce the loss of sales, additional advertising expenses incurred to reduce the loss of sales because of the interruption or additional costs incurred to replace inventory.
Expenses which are saved during the interruption of business must also be considered. For example, wages, certain utilities or rentals may often be reduced by the organization after a loss, and such “saved” expenses must be deducted in determining the amount of business interruption loss suffered by the organization.