Business Interruption or Loss of Profits

The devastation caused when property is lost, destroyed or damaged can extend beyond the physical. The emotional upheaval, stress and disbelief can have a greater impact than the actual damage. While it is not possible to eliminate these affects, with proper planning and adequate Business Interruption or Loss of Profits insurance they can be greatly reduced. In some cases significant benefits can be derived with a refocusing of effort and a reappraisal of critical facets of the business.

Provided the Material Damage policy (upon which a Business Interruption claim depends) allows sufficient funds to reinstate the physical damage in a timely manner, the Business Interruption policy financially supports the business until it returns to the predicted profitability.

To ensure that a Business Interruption policy operates as intended, it is essential to specify the correct Gross Profit, sufficient to cover all fixed and semi variable costs and expenses plus the net profit anticipated.

What to consider

Two of the more important considerations are; that the Gross Profit is specified in accordance with the definition on the policy (not the accounting definition), and that is set taking into account the intervening insurance period and the Indemnity Period. In most cases this will mean projecting what the Gross Profit might be 12 or 24 months ahead. One should not be concerned about overstating this figure as a refund is generally available under the policy should the company fail to meet budget.

Indemnity Period

The Indemnity Period is the number of months for which the insurer will pay any increased costs or shortfall in Gross Profit. When considering the appropriate Indemnity Period the factors which might impact are; loss of customers or markets, reordering,  delivery and installation of plant, rebuilding or relocating premises, loss of critical staff, replacing technologies, consents, increased costs of raw material and, after recommencing operations, the time before returning to pre-loss profitability.

One can never predict when a disaster affecting your business operations might strike but having a Business Continuity Plan and full Business Interruption Insurance can alleviate the inevitable stress, cost and inconvenience caused.

To do otherwise invites financial disaster, not only to the owners and shareholders but potentially also to staff and even your customers.

Like to find out more about business insurance, contact one of our experienced Brokers today.


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