The impact of an unforeseen event can have a serious effect on a client’s fixed expenses as well as the ability to carry on supplying goods and/or services to customers. Business interruption insurance exists to help a business get back on its feet after an unforeseen event. It’s a crucial survival tactic and should be seen as a vital part of a continuity plan for a business. It insures a business against loss of revenue and helps it to continue to pay overheads and expenses such as rental during a period of downtime. Business interruption insurance helps a business return to the same financial position it was in prior to an incident.
For example, a restaurant’s kitchen was ruined by a fire that started in the early hours of the morning. As the restaurant was dependent on the kitchen for normal operations, it was forced to close its doors. This meant no income was received during the repair period, but overheads such as rent, electricity, water, salaries and payments to suppliers remained due at the end of each month. If the restaurant hadn’t had business interruption insurance, it’s unlikely it would have survived the financial impact of the fire.
In another recent example, a Santam client’s hardware shop was damaged in a fire and the repairs to the building were going to take at least six months. The shop obviously couldn’t risk losing customers to its competition. Santam assisted by arranging alternative temporary premises close by and also covered the cost of renting and advertising the new location while the repairs were underway.
Avoiding an under-insurance shortfall
As an intermediary, you have an all-important role to play in ensuring that your business clients have adequate cover in the event of business interruption. All too often clients find their cover falling short, which could mean that they are forced to close their business. Over the years, we’ve come to know the 3 most common pitfalls to watch out for:
1. Choosing an adequate indemnity period
The indemnity period chosen needs to be sufficient to allow for the building re-instatement, sourcing/ordering and commissioning of a new plant, equipment, machinery etc. It should also allow enough time for the business to return to pre-loss production and turnover levels – in other words, the recovery period. The length of the period would need to be sufficient to cover costs from the date of the incident until the business is no longer affected by the disruption.
2. Understanding the difference between Financial and Insurance Gross Profit
Financial Gross Profit: takes account of various direct manufacturing costs, for example wages, factory overheads, water and lights etc.
Insurance Gross Profit: takes account of the uninsured costs as chosen by the client. These uninsured costs would be indicated on the policy schedule, and as standard would include “purchases; bad debts; and discounts received and allowed”.
By calculating the Insurance Gross Profit based on only the uninsured costs, the rate of Gross Profit would be higher, enabling the client to pay the on-going expenses i.e. wages, factory overheads, water and lights etc.
3. Miscalculating Gross Profit
It’s important to note that the client is insured against applying the rate of Gross Profit to the reduction of turnover, not against the total reduction in turnover. The Gross Profit sum insured should:
Reflect a 12-month period where the maximum indemnity period is 12 months or less; or the appropriate multiple of the annual turnover where the maximum indemnity period exceeds 12 months;
Cater for trend, taking cognisance of a loss that may occur close to or at the end of the insurance period.
Introducing the Santam Business Interruption Calculator
Every business has its ups and downs but business interruption is certainly one of the biggest risks a company can suffer. It can also be difficult to estimate, which is why Santam has created an innovative online tool – a new way to make sure that your client’s business interruption sum insured is calculated correctly and the claims process is as hassle-free as possible.
Our video guides you on how the tool works to enable you to advise your clients:
Business interruption insurance from Santam
If you want to find out more about the business interruption insurance offered by Santam, speak to your Relationship Manager or get in touch with Santam. For more advice tailored to intermediaries, visit our blog for useful product-related articles – such as what private and commercial drone operators need to know about their liability risk and the aviation cover available to them.