Misfortune can be overcome with business interruption insurance.
While all forms of insurance, subject to applicability, are important for the security and long term welfare of a business, business interruption insurance is among the most vital.
Understanding business interruption insurance is not difficult, although it is a term that is often misunderstood.
A simple business interruption insurance explanation would be that it is a form of insurance that protects a business from loss, resulting from any stoppage of business operations due to fire, earthquake, tornado or any other such insured occurrence.
What business interruption insurance does is to provide a business with income to keep it going until such time as the reason for interruption is removed and work can begin again.
This means that if a fire has occurred and work cannot continue, the company will receive insurance to cover its loss of income, until such time as it is able to resume work again, at which time the insurance payout would stop.
If the work needs to be resumed in stages, the business interruption insurance policy will make up the difference between the limited operation income and the total income that prevailed before the work had to be stopped.As the business’s own income increases, the insurance payout will reduce.
Business interruption insurance may have various riders or additional clauses attached to it to cover other contingencies also.
For example, a policy may include coverage for the paying of rent for the use of temporary premises until the original place of business is returned to a fit state for work to resume there.
Of course, in this case since the business will be operating from a temporary location, the policy will only cover any shortfall in income arising from the use of the temporary premises.
As a business owner, you are subject to various uncertainties from changing market conditions, to power problems to transport strikes and so on.
As long as you are able to continue working, you should be able to either find a way around these circumstances or survive until the problems are solved.
But if your work comes to a standstill, and your income stops, you have no resources to fall back on. Even if you have a highly profitable company, you will not be accumulating huge cash reserves in the bank.
Smart businessmen will employ their profits where it does them the most good and gives them the highest return. That means that the money will not be available to them just when they want it.
And even if you have a million dollars in the bank, why use it to cover business losses when an insurance policy will do it for you?
A few important factors to keep in mind when buying business interruption insurance are:
- The policy will cover you for loss of income based on your previous financial results.
Make sure that all your paperwork and accounting is up to date, so there is no dispute on the amount of compensation due to your business.
- Make sure that the policy limits are enough to cover your business in a worst case scenario- often repairing a premises can take longer than imagined – repairing major fire damage can take weeks, not days.
Also keep in mind that there is normally a 48 hour waiting period before the policy comes into force.
- The premium is based on the estimated likelihood of the nature of your business resulting in business interruption.
For example a fireworks factory will pay a higher premium than one that makes shoes. Also premiums are higher where natural disasters are more likely – say places where tornados occur frequently.
A business interruption policy can be modified to cover extra expenses, subject to the incurring of these expenses resulting in a faster repair of the premises or a reduction in the total claim value.
For example, if you need to run your business from a rented location for a month, but the only one available is far away, the business interruption insurance could cover the cost of transporting your workers there, if the result is that your business is able to resume at least partial operations sooner than if you wait for the original premises to be repaired.
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