Cash flow is the life blood of any business and if you want your business to recover from a catastrophe, it’s critical to protect your cash flow properly.
Business interruption insurance protects the gross profit of your business so you can continue to meet ongoing expenses while recovering. If set up correctly, the intent behind business interruption insurance is to place your business into the same financial position it was in prior to the event that resulted in a reduction or cease of trade.
Why is business interruption insurance important?
Imagine on the 1st of July your premises caught on fire. The building which you were renting has been destroyed along with all your contents, equipment and stock. Without a premises to trade from and with no equipment, contents or stock, your business has no way to continue operating. If your business can’t trade, how will you;
- Pay wages,
- Meet loan repayments,
- Repay creditors,
- Pay Rent (this may still be enforceable based on your lease agreement),
- Pay for fixed personal expenses (home loan, schooling, electricity, rates …..)
Luckily you have insurance for your contents, stock and equipment so you can re-purchase everything the business lost, however the settlement of your claim is likely to take a couple of months. And then there’s the question of a premises. How quickly can you find a new location or do you want to wait for your current premises to be rebuilt? If you find a new location, how long will the fit out take? Is the stock and equipment you need to run your business readily available?
In reality, if your business does suffer a significant event, it’s likely you will not be up and running for at least 6 to 12 months.
This example is a worst case scenario. Business interruption insurance also responds to partial losses and will supplement a drop in income due to an insurable event disrupting your ability to trade.
When can I lodge a business interruption claim?
If your business income drops due to an insurable event, you can lodge a claim. An insurable event will generally include damage to your premises, contents, equipment or stock caused by fire, storm, cyclone, earthquake, impact or accidental damage.
A business interruption event can also be triggered by prevention of access to your premises or loss off public utilities.
Importantly, if your business is dependant on machinery to generate an income, machinery breakdown will generally not trigger a business interruption claim. If you require this protection, you will need to look at packaging business interruption insurance under your machinery breakdown section.
How much do I need to insure for?
Calculating the correct sum insured is very important because this section contains an under-insurance clause. This clause allows insurance companies to reduce claim payments if your business is under-insured.
Depending on the type of business, calculating the correct sum insured can vary from being quite simple to complex. We recommend you engage the services of a professional insurance broker to assist with this calculation.
How long will business interruption payments last?
As a business owner, this decision is in your hands. You can select a benefit period that works for your business. When considering an appropriate benefit period, we recommend asking yourself the following questions;
- How long will it take for new stock to arrive?
- What’s the availability of replacement machinery or parts for damaged machinery?
- Do I want to continue operating from this premises? If so, how long will it take to re-build?
- If you can move your business location, how quickly can I find a new premises?
- How long will it take to fit out a new location?
- Will I lose customers to competitors? If so, how long until you can win those customers back?
At Guard Insurance Brokers, we understand that business interruption insurance plays a critical role in developing a comprehensive risk management plan for all businesses. That’s why we have professional brokers that specialise in business interruption insurance. Setting up the right cover can be complicated, so don’t put your business and livelihood at risk.
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