What is business interruption insurance?*
Business Interruption Insurance can provide important risk protection for businesses as without an operating business, income is not generated, while costs, such as rent and wages are still incurred.
While standard commercial property insurance covers the physical loss or damage to property, it does not cover the loss of income unless explicitly included.
In Australia business interruption insurance can sometimes also be referred to as:
- Business Continuity Insurance
- Business Revenue Insurance
What is Loss of Profit as result of Business Interruption?*
Loss of profit from business interruption can occur in two ways. A business's sales go down or the cost of operating the business go up.
Typically when a business suffers a business interruption event that causes a loss a sales the impact on profit may be offset somewhat by a saving in costs. For example, a reduction in cost of goods sold.
On the flip side it may typically also incur increased cost of working. That is, "new extra" costs may be incurred. For example, relocation expenses, express freight, temporary labour or client/supplier communication expenses.
The objective of a business interruption policy is to cover the loss of sales, less the expenses not incurred, plus the increased cost of working.
What is the difference between Business Continuity Insurance and Business Interruption Insurance?
There is typically little or no difference between Business Continuity Insurance and Business Interruption Insurance.
Business Interruption Insurance is referred to as Business Continuity Insurance by some business owners as the cover is intended to provide funds to a business that allows a business to continue trading when the usual source of funds ; usually sales ; are not being generated due a specified event.
Another reason why some business owners refer to Business Interruption Insurance as Business Continuity Insurance is that without this cover many businesses do no survive or continue to operate after a major incident.
Are business revenue and business interruption insurance same?
Business Interruption Insurance is referred to as Business Revenue Insurance by some business owners; as in simple terms , they see it as a cover that protects the revenue of their business.
What is an adequate indemnity period for your business?
It's important that business interruption insurance is continually monitored to ensure it reflects the real position of your business and that sufficient time is allowed for in your cover to:
- remove debris
- address environmental issues
- make strategic decisions
- obtain planning permits
- tender the project
- reconstruct or rebuild plus order
- receive commission equipment
- and win back new customers
Take care not to underestimate how long it could take for your business to fully recover.
A business that operates from their own premises and has complicated equipment will typically require a longer indemnity period than a business that operates from a rented space and has no complicated equipment to replace.
A minimum indemnity period for a business that operates from a rented space and has no complicated equipment to replace is 12 months while a business that operates from their own premises and has complicated equipment will typically require 24 months indemnity period.
The relatively small cost difference between a longer indemnity period and a shorter indemnity can normally be easily justified from a business perspective. When you compare the potential negative impact not being covered for a sufficient amount of time can have on your business – the worst case , the business NOT becoming viable again – any "savings"" on a shorter indemnity period are put in perspective.
How much does Business Interruption Insurance Cost
Depending on the business size and activities the cost of business interruption insurance may vary from a few hundred dollars to thousands of dollars.
Business interruption insurance for small businesses is often purchased as part of business insurance package.
As a percentage of total business insurance package costs business interruption insurance may add anywhere from 10 to 30%+ to the premium.
As it’s difficult to generalise about business interruption insurance cost for different types and sizes of businesses it smart to ask for a business interruption insurance cost when reviewing your other insurance covers or by simply calling a SMART Business Insurance broker on 1300 542 573.
Please note; there is a lot more to suitable business interruption insurance than just low cost. It's important that the cover you purchase can provide your business with sufficient resources and time to recover.
If you want to discuss if your organisation is adequately protected for business interruption, please call us on 1300 542 573 to talk to a Business Insurance Specialist or email us at email@example.com.
*Important: Cover may be available subject to meeting insurers underwriting criteria. Some of the covers listed may or may not be available or may have limitations or exclusions. Cover inclusions vary significantly from insurer to insurer. DO NOT rely upon the above. Check your policy schedule carefully for inclusions and exclusions and limitations. Talk to a SMART business insurance broker on 1300 542 573 for more information.