Remember the floods that submerged huge swathes of the UK in Aprilness. With the right insurance, even a nightmare of epic proportions needn't mean curtains for your company. and October 1998? Recall the Manchester bomb of June 1996? Apart from the obvious human misery caused by these natural and man-made disasters, they also resulted in businesses grinding to a halt. Some survived, but many did not.
Common sense should tell any company owner that to operate a business without insurance - be it for buildings, contents, vehicles or employees - is tantamount to commercial suicide. Yet many companies' cover doesn't protect against unforeseen interruption. Business interruption insurance, or BI, is what they are missing.
According to Paul Doggett, account executive at Cambridge insurance brokers Town & County: 'BI's ultimate aim is to maintain business profits in the event of a disaster. The problem businesses face is that if, for example, their premises are flooded, destroyed in a fire or blown up because of terrorist activity, it takes time to get the business fully functioning again. Costs are still incurred while production is down or non-existent - for example, staff still need to be paid even though the business cannot use them in the short term.'
BI is different from buildings and contents insurance in that the latter two only replace or repair the physical items insured, while BI should be thought of as a way of keeping a business alive during its recovery period.
BI operates in three ways. First, it covers the fixed or ongoing costs of a business that cannot be met out of any financial reserves. The majority of these need to be paid irrespective of whether work is possible. They might include leasing and staffing costs, business rates and mortgages.
Second, BI policies will cover any increased or extra costs that are required to get the business up and running. These could include finding a new site, redirecting post and telephones, acquiring equipment, paying overtime, using friendly competitors to complete orders, buying fresh supplies and placing advertisements to tell your customers of the temporary change in business circumstances.
Finally, a BI policy will pay out enough money to maintain the level of net profits the company had insured for.
The amount charged for BI depends on the type of business and the length of time for which BI will be paid after a disaster strikes. Insurers term this the maximum indemnity period. Generally, companies can expect to pay between #375 and #500, based on a gross profit of #250,000. It goes without saying that the premium is dependent on information supplied by the proposer. Leading insurers in the field are Axa Provincial, CGU, Royal & Sun Alliance and Independent.
Should a business need to claim on its BI policy, its management must be aware that the insurers need to see accounts before any payments are made.
Doggett says: 'Insurers use various accepted accounting principles to establish their liability to pay a claim. They look for information on variable costs, such as raw materials, that rise or fall depending on the required production/sales; data on fixed costs such as business rates, which do not vary according to the level of sales; net profit; revenue levels; and gross profit, the difference between revenue and variable costs.'
He adds: 'So, make sure that once you've taken out BI, you keep the policy, documentation and detailed business accounts information safe. Without the official paperwork, you may have a devil of a job proving what you are entitled to.'
It might seem bureaucratic at the time, but no insurer will pay out a claim unless the loss can be quantified. If you do not have copies of your accounts, expect to have to prove the claim some other way.
Payment times on BI claims vary. According to Doggett: 'It is difficult to quantify the time it takes to pay a claim since every case is different.
However, insurers will process the claim on receipt of accounted losses so that they avoid any further liability for losses.'
When choosing a BI policy, or any other insurance policy, it is vital to check the wording used by the insurers. Insurers use terminology which is precise and therefore not open to confusion. For example, a policy may not cover subsidiary companies, so if one business acquires another, it will need to change the policy terms. The policy will detail exactly what it will and won't pay for, so make sure it matches your needs.
There are ways of reducing the BI premiums charged. 'The risk, and therefore the premium, can be reduced by either greater fire protection or by separating areas of the working environment; by carefully planning work processes' organisation; and by publishing a detailed contingency plan.
The plan needs to outline actions to be taken following the disaster, with a detailed log of contact names and numbers of favoured contractors and suppliers that will help the business to restart quickly,' Doggett says.
'At the very least, the plan will show the business the areas of risk where pre-emptive action can be taken. Update and test it regularly.'
Companies should make sure they regularly review their level of BI cover - insurers believe that most policy holders are under-insured. If insurers find this is the case, they'll only pay out a proportion of the claim.
To prevent this, make sure the policy is declaration-linked.
It is a harsh reality of the times that every business needs to be 100 per cent effective 100 per cent of the time - any downtime will diminish your chances of survival.
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