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business interruption - insuring your income


You worked hard in your restaurant that night. The tables were fully booked and, for once, everything seemed to go smoothly. Just before you fall asleep, you think back to all the frustration and hard work you have contributed to get ting your business up and going and the risks you have taken. At last the restaurant is becoming established, you have a following of loyal customers, and revenue is beginning to flow. Your last thoughts, before closing your eyes, are of your bank loan- perhaps you will be able to pay it off sooner than you had planned.

However, a telephone call at 3.00am changes things completely. Your restaurant is on fire and it seems clear that nothing will be saved.

The following morning you take stock of you situation as you look over the still smoldering site. Luckily you have fire insurance and you had just reviewed your cover with your agent; surely everything will be covered. Your meeting with your agent goes well; he advises you on your obligations regarding the submission of your claim for the loss of your fixtures and inventory, and you are told that a loss adjustor will be arriving from Miami in a few days to begin the task of adjusting your estimates. You also learn that your landlord was covered and that he is dealing with his agent regarding his claim. Everything seems fine - but -  wait a minute… no one has mentioned any compensation for your loss of business during the period of your closure. You know that you will be out of business for an extended period, whether you wait for your landlord to rebuild, or find another location to establish a new restaurant. During that period you may lose many of your loyal diners. How will you pay your bank loan, what will happen to your staff and your new French Chef? Most important, where will your income come from? How will you feed yourself and pay your living expenses. You call your agent. Well yes…he had offered you the option of this cover, but it’s rather complicated, expensive and when you decided not to take it, he did not pursue the matter. You vaguely remember it being mentioned somewhere in the background of your discussions. Perhaps you and your agent should have given the subject more attention.


BUSINESS INTERRUPTION INSURANCE
As part of our industry’s efforts to confuse their policyholders, this subject has been given several titles: Business Interruption; Loss of Profits; Loss of Revenue; Wages and Income Protection; Loss of Rent, and more. Whatever the particular title chosen by your Insurer, the policies share a common purpose; to protect your income, following an insured loss at your premises. The cover is available to any business or property owner who stands to lose income as a result of a fire, hurricane or other insurable loss at their place of business. Restaurants, hotels, shops, offices and rental villas are all at risk.

As these articles are not intended to provide textbook definitions of insurance subjects, but, rather to provide practical guides to non-insurance readers, I will restrict the subject matter to identifying some of the more important points that you should consider before and during your discussions with your agents.

  1. Gross Profit Sum Insured- The Gross Profit Sum Insured is the principal item to be covered by most businesses. The policy definition of Gross Profit is determined by your projected sales less your purchases and any specified working expenses that you opt to exclude from your payout, following the loss at you premises. Business covers will also take into consideration the differences between your opening and closing stocks.
  2.  Indemnity Period- this is the period of payout following a loss and it’s entirely arbitrary. The idea is that the period should be sufficient to place you in the position that you would have been in had the loss not occurred. You have to remember however that the indemnity period is material to the determination of the premium that you will pay so a longer indemnity period will naturally cost more than a shorter one. You can normally choose periods increasing from 3 months, 6 months 12 months or longer. The price of the cover does not increase proportionate to the Indemnity Period chosen. A 12 month Period will usually cost 30% more than a 6 month cover. If you choose a period of less than a year, the sum insured on your policy is representative of 12 months Gross Profit. This is very important to remember, and the reason for stating your sum insured as an annual figure is to take into account seasonal changes in your business throughout the year; such as the tourist season.
  3. Getting Back into Business- Most policies will cover you right up to the time that you retain your expected trading position. This can go beyond the point that you are able to re-occupy your premises, and covers the period that you are re-building your business. Some policies however, will only cover you until you are back in your premises.
  4. Wages and Payroll- You have the freedom to decide if, or how you insure your Payroll. Many companies opt to cover 100% of their payroll for the entire indemnity period. Others cover key staff only or a combination, involving key staff for a longer period than other employees. Discuss this matter with your agent and get a feel for the difference in pricing.
  5. Consider the Risk- When you are calculating your sums to be insured always remember this- A loss could occur on the last day of your policy year. That means that the interruption in your business could start 12 months from the day you take out the policy and that interruption could extend well into the following year. If you have a rapidly growing business, this feature could be important in obtaining a fair payout, so take the growth of your business into consideration in calculating your Sum Insured.
  6. Particularly for Villas and other Property owners- Rent receivable is usually covered as a free extension under most Homeowners Comprehensive policies, but the payout is limited and the terms differ between Insurers. If you have an apartment or villa, check your policy to determine its limits; if they are inadequate, for an additional premium you can add a specific item to cover rent under your policy. Rent is not normally covered automatically under commercial fire policies. If you are renting out your building, you need to include rent receivable under as separate item to be insured under your fire policy, or take out a business interruption policy to cover your exposure. Discuss the differences offered by the two options with your agent.
  7. The Cost – Because interruptions follow insured losses on your property policy, the premium rates are normally based on the rates demanded for your property insurances- these rates are adjusted by the indemnity period you chose and other underwriting features. 
  8. Payout- Because these policies are intended to maintain your income and cover your expenses, payments are normally made on account following a loss. The policy should pay for your Auditors fees to assist you in establishing your claim and producing scheduled payments towards you continuing expenses.
Business Interruption Insurance is not a cheap addition to your portfolio, and., because of its complicated nature it can be sidelined by Insurance agents who are not conversant with the subject. It is, in this writer’s opinion an extremely important consideration for any policyholder dependent on his income for survival and the subject should be given the priority it deserves during any review of your exposure.

So talk us about this cover, if you have not already done so.

Tony Lancaster A.C.I.I.
Project House, 930 Leeward Highway, Providenciales, Turks & Caicos Islands | Telephone: (649) 941 4814 | Fax: (649) 946 5593