As a most loved local business, your fans rely on you to keep your doors open - even when disaster strikes. Business interruption insurance is designed to protect your business against lost profits should your property be damaged or destroyed by fire or natural disasters like flooding, earthquakes or tornadoes. Here are five must-know facts about this type of cover to safeguard your profits.
1. It’s cover added on to existing business insurance cover
In order to have this type of cover, you need to have fire or property business insurance in place. While property insurance covers physical damages, business interruption insurance covers the profits you would have earned if it was business as usual.
2. Must-have for most types of businesses as part of their survival plan
Can you imagine keeping up with orders if your most important piece of machinery burns down? Can you fathom having to close your doors for months – while still paying all your staff and bills? After working so hard to build up a fan base, can you imagine them going to your competitors? Most businesses should see business interruption insurance as a must-have survival plan. Work with your broker to plot out your worst-case-scenario and how you would deal with a disaster, especially for:
- Companies that rely on physical assets to operate their business.
- Those with retail, wholesale, manufacturing or catering businesses.
- Businesses located in high-risk areas - e.g. frequent flooding or veld fires.
- Businesses owning equipment or machinery that need to be imported or take long to be customised before you can get back to production.
A business interruption insurance policy will be tailormade to your business operations and turnover, but typically covers the following:
Profit: You will receive funds to cover the profits you would have earned during the time you had to close your doors. This sum is based on the income of previous months and the forecast of trends in the future.
Temporary relocation: While your premises are being repaired, it will cover costs for you to move to and operate from a temporary location.
Fixed operational expenses: Based on historical costs, the policy would cover any expenses and costs that you continue to incur even though you’re not operating. E.g. wages, water, lights.
Fines and penalties: Covering costs to service providers including any fines or penalties for being in breach of contract.
Additional increase in the cost of working: Any other reasonable expenses that will allow you to continue operating while your property is being repaired.
Business interruption cover protects you against disasters that are out of your control. It’s not for:
- Damages due to political unrest: This forms part of the SASRIA part of your insurance policy, covering things like civil commotion, public disorder, strikes, riots and terrorism.
- Liability or liability claims: If your business comes under a cyber attack or you face a liability claim, it’s best to have specific insurance in place to protect you against these perils.
- Bad business decisions or slowdowns in the economy.
4. Accurately calculate your gross profit
One of the common pitfalls of business interruption insurance
One of the common pitfalls of business interruption insurance - where businesses find themselves underinsured - is when they don’t properly work out their gross profit. Your broker will help you ensure that this amount includes VAT and reflects either a 12-month period (if your maximum indemnity period is 12 months or less) or multiples of the annual turnover (where the maximum indemnity period is more than 12 months).
There is a difference between what you know as a Financial Gross Profit, and an Insurance Gross Profit. The latter excludes costs/expenses that vary in direct proportion to a change in turnover. Examples are purchases, bad debts, discounts allowed and direct commission. If, for example, turnover or sales dropped by 10%, so would each of these costs.
5. Work out a sufficient indemnity period
Your broker can help you set the right indemnity period for your business. This should allow you enough time to remove damaged property, replan your business (including getting building plan approval), reorder stock and machinery, rebuild your property (including any installations), recover lost markets and restore your turnover to what it would have been had the disaster not happened.
Remember, there is no one-size-fits-all approach to getting a business back on its feet. With Santam’s small business insurance solutions, we can help you protect the business you’ve worked so hard for. Speak to your broker to find out more about the essential insurance cover for your unique business needs.