5 Business interruption tips

5 things you need to know about business interruption insurance

I know, your eyes start to glaze over when the discussion of business interruption comes up with your agent or broker. It all seems so dry and uninteresting. Bear in mind that as with everything to do with insurance there are no absolutes. Usually if you are willing to pay the price then a specific type of wording or coverage can be found. What we are discussing is the usual type of policy that you will be offered. So here are a few pointers that will help you in making your choice:

1. The two basic forms of business interruption insurance are Gross Earnings and Gross Profits. If set up correctly they both will pay you for the gross profit portion of lost turnover plus the additional costs of working for the object of reducing loss. There is a savings as a result of reduced costs so this has to be deducted. How they differ is rather important. A Gross Profits policy starts from the day of the claim until the business is back to the profitability it was at just before the claim occurred. Gross Earnings policies pay only for the time that it takes with due diligence to repair or replace the income producing property.

2. A Gross Earnings policy requires that anyone and everyone who has a influence in the time it will take to rebuilt, repair or replace the damaged property has a diligence requirement. This takes away some control from you. Examples would include a contractor does not install the flooring promptly or if a landlord delays repairs. Both of these would result in you not being paid while the work is delayed, even though you could not control the delay. Gross Profits only places the duty on you, the insured. What you cannot control will not stop payment from the insurer.

3. Gross Earnings for manufacturers does not pay in respect of finished stock which is still in your custody. To gain proper coverage you need to add a selling price endorsement to the stock coverage in consideration of these goods.

4. Gross Profits forms will not usually include ordinary payroll and if it is added in then there is a limitation of 60-90 days. Gross Earnings forms include ordinary payroll. If you chose to delete the full payroll and amend it to the limited time period then this is also an option.

5. Co-insurance is a big factor between the two types of insurance. Co-insurance is the amount you must insure to prevent a penalty if there is a claim. The Gross Earnings Insurance wordings do not include the expenses to reduce a loss as part of the co-insurance calculations. Actual Loss Sustained is a form of Gross Earnings but no amount is named. Gross Profit usually has 100% co-insurance which means you must insure to 100% of that value. With the Gross Earnings you can pick either 50% or 80% of the amount determined. The 50% is chosen when you think that your business will be restored within six months. The 80% is meant for a 12 month period. There is a special Earnings No Co-Insurance policy that has limitations on how money is paid out - usually a limit of 25% - 33-1/3% for consecutive 30 days.

If you have considered the possibilities of what can go wrong and how severe this would be then you have an idea of what you would want the insurance to do for you. If you had a major claim and it took six months or more to rebuild would you lose many of your customers? Would they be quick to come back or would business trickle back in over time? Do you have some employees that you really want to keep?

Avoiding claims is always preferred to having to deal with a large loss. Having bought the right coverage before the claim occurs is much better then realizing that you do not have the resources you need to get back to being profitable. The wrong choice might mean that you will end up closing your doors and worse yet, be in a deficit position. Spend time with your broker or agent and know which coverage you have purchased. As your needs change, you might want to reconsider.

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