Business interruption insurance is designed to return your business to the same trading position that it was in before a disaster struck. It provides cover for loss of income suffered if your business has to cease trading for a period of time following a disaster.
But do you know how to go about calculating the level of business interruption insurance that your business may need?
Here we look at two factors which are critical to get right in your business interruption insurance calculation:
It is vital to have a good handle on your business income levels. You will need to ensure that you can calculate your gross profit levels as this will be key to setting your level of cover correctly.
Likewise, ensure that you adjust your figures for future expected trends. If you are expecting your business to grow for example and for your business profit levels to increase, then you need to include this in your calculation. This is to ensure that you can return your business back to the position it would have been in had the disaster not happened.
Once you know how much cover you are likely to need, most business interruption insurance policies will require you to set an indemnity period. The period of time for which the policy will pay out for. For example, you could set this at 24 months following a disaster.
It is therefore important to have a realistic idea of how long it would take to recover from the impacts of a disaster. In many cases, recovery back to pre-disaster trading position takes a lot longer than many business owners would expect. Delays in planning permission if premises need rebuilding, supply chain issues, lead times for replacing equipment and winning back business and customers can all add significant time. It is therefore best to look at worst case scenarios and plan for a wide range of situations when deciding on your indemnity period.
If you underestimate the length of time you require lost income to be covered for, your policy may end before you are back up and running. Regardless of whether you have used up your sum insured or not.
It is vital that you get these figures right to avoid finding your business in a position of being underinsured. Underinsurance is where you do not have enough insurance to cover your assets as well as the costs of getting back up and running and can be a real threat to your business continuity. Given the complex nature of the calculation it is probably best to work with a broker to ensure that you put sufficient business interruption insurance in place.
As well as ensuring that lost income is covered, you also need to ensure that you can act quickly in the event of a disaster to minimise the impacts on your business. First Recovery are specialists in disaster recovery and supporting businesses through difficult operating times. If you have any questions about how we could help your business, then don’t hesitate to get in touch with us today.