Link 16 new - SCLG

68 Insurance
Business Interruption Insurance can help you get back on your feet
Risk Advice
It is difficult to comprehend why many
otherwise responsible businesses do not
arrange business interruption (BI)
insurance. For many, the awareness of
insurance protection stops at the cover
provided for physical assets such as
buildings, contents and stock. But in the
event of a major incident occurring, it is
often the interruption to a company’s
activities that will result in the greatest
loss. In extreme, yet too often
circumstances, this can result in a business
having to cease trading.
Even a relatively minor incident can have
a big impact on a business if it relates to an
integral part of the production process.
For instance, damage to just one machine
can completely halt production if that
machine is a critical part of the procedure.
This interruption may be long-lasting if
the machine cannot easily be replaced.
How does Business Interruption Cover
work?
BI cover will be arranged in conjunction
with the property damage insurance.
Effectively, it extends that cover to also
include the ‘consequences’ of a major
incident. These ‘consequences’ may result
in a reduction in a company’s turnover.
Additionally, there can be an increase in
costs as the company attempts to make
alternative trading arrangements and
thereby minimise their turnover
reduction. Both these factors will reduce
the company’s gross profit over a period
of time. BI insurance can compensate for
this loss of gross profit.
For a major incident such as a fire,
explosion or catastrophic weather, the
resultant damage can be so significant that
a company will no longer be able to
occupy their business premises. It may
take time and expense to move operations
to an alternative location. It can also take
time to replace damaged stock, which might
have to be sourced from another country.
“
For many, the
awareness of insurance
protection stops at the
cover provided for
physical assets such as
buildings, contents
and stock.
”
When arranging cover, the policyholder
will need to select an appropriate
‘indemnity period’. This represents the
MAXIMUM period of time that the
policyholder considers it will take to
resume full trading and, importantly, to
recover any loss of market share. Usually,
this will be set at a period of between 12
and 24 months, although longer periods
can be selected.
What can be included in Business
Interruption Cover?
Interruption as a result of a major incident
directly impacting the policyholder’s
business is the obvious and most common
situation. However, there are a number of
additional scenarios not directly related to
the policyholder’s business premises that
may also have a devastating impact on
turnover. BI policies can usually include
these either in the standard policy cover
or by way of special extension. These may
include loss of business due to:
An incident at a major supplier’s premises.
If you are heavily reliant on one particular
supplier of raw material, parts etc., then
your business may be impacted by a
significant interruption of their operations
An incident at a major customer’s
premises. Likewise, you may be heavily
dependent on one particular customer
who may be forced to cancel orders
should their business be interrupted
Denial of access to your premises following
an incident at the premises of a neighbour.
This may involve access to your premises
for yourself or your customers
Damage to public utilities. If, for instance,
a local electrical sub-station or waterworks
is damaged, this may have a big impact on
your business for a period of time
As is the usual comment here, insurance
should be only part of the solution. A
business can take additional steps to
minimise the risk and consequences of an
interruption. This may include having a
contingency plan to enable continued
trading; good physical protections to
minimise the risk of an incident occurring;
alternative suppliers who may be called
upon or reciprocal arrangements with a
‘friendly’ business to share premises or
machinery on a short-term basis.
But Business Interruption cover should
never be ignored. It can often make the
difference between business survival and
business oblivion!
Keith Byrne-MBA, ACII,
Senior Underwriting Advisor Tokio Marine & Nichido
Fire Insurance Co. Ltd
Supply Chain & Logistics Group | www.sclgme.org