A guide to business interruption insurance

In business, continuity is the baseline of success. That’s because in almost all cases, continuous revenue and cash flow without interruption is the lifeblood of SMEs.

Ensuring a business has the correct insurance to continue to trade irrespective of internal and external factors, is absolutely key to that business’s success, regardless of size.

“Access to a steady income to meet personal living expenses, fund lifestyle choices, pay commitments to lenders and landlords is a fundamental requirement for most people,” explained QBE National Product Manager for Commercial Lines, Andrew Norris.

“That applies whether the income is generated from a wage or salary, or derived from business income. For business owners the protection of physical assets that exist to generate that income stream is also important.”

While this isn’t news to most business owners, there can sometimes be a gap in understanding about the options available for worst case scenarios when a company is forced to close operations for an extended period.

“Business interruption insurance deals with the continuity of income after insured property is damaged or lost after a catastrophic event,” Norris said.

“It operates to cover business cash flow and in the process also protects the owner’s income stream and their investment in the business. The cover pays for ongoing costs that continue regardless of whether the business is closed or substantially affected; e.g. rent, fixed electricity, gas and water charges. It also covers additional costs incurred to minimise the effects of the closure or downturn, plus net profit and/or loss.”

Consider what would happen to revenue for a café owner if their premises were damaged. The owner might have to close business until repairs can be completed.

In most cases, Norris said claims are triggered by weather or fire events.

Protecting your business priorities

Norris said emerging risks can range from increased frequency and severity of existing risks, such as climate change impacts on storms, water levels, bushfire risk; to new risks that develop through advances to technology and social or political changes, including terrorism, regulatory changes, pollution and other environmental impacts or food supply.

“But the risks faced by a business will vary based on the company, it’s critical operations, the risk management options available and a business owner’s risk appetite,” added Norris.

In terms of purchasing business interruption cover, the business owner has three concurrently operating areas of interest:

• paying ongoing business expenses to ensure the business is not wound up, and to protect the capital already invested into that venture
• meeting personal guarantees given in connection with the business, and
• maintaining personal income

Consider indirect risks to your business

Business owners can often overlook risks that could indirectly impact their company, so Norris said it’s important to take this into consideration too.

He said indirect business impacts refer to events affecting property other than the insured’s own. That includes damage to the premises of customers or suppliers, providers of public utilities, access issues due to damage to adjacent premises, or to roads, bridges or railways.

Given the potential ripple effect of damage an event such as public utilities breaking down could cause, Norris said almost every type of business can be affected.

The September 2016 state-wide blackout of South Australia is a prime example. The entire state was left without power for several hours after extreme storms damaged 22 high-voltage power pylons.

“Retail situations in a shopping centre cannot easily move to other premises and retain the same customer traffic. They also may have a high level of dependency to specific product suppliers,” Norris added.

“Manufacturers have high dependency levels on customers and component parts suppliers. Wholesalers also face similar issues and may be severely affected by transport delays due to damage to roads or bridges.”

He said it’s also important to remember that where these services cover a wide geographic area, major delays can be experienced in relation to restoration, especially where catastrophe scale storm or bushfire events happen.

The indemnity period explained

The indemnity period is the amount of time during which a business owner can claim the benefits of their business interruption insurance policy.

It’s typically the most important part of arranging the policy because the period decided will determine the total loss of interruption.

Business owners should be mindful not to underestimate the length of time it could take for the company to be back to full operating capacity. 

“The indemnity period generally operates from the date of property damage caused by an insured event. Although some wordings extend the start date to the date when the financial results are first impacted,” Norris said.

The first consideration is the expected re-building period, but Norris said this will vary depending on the structure and there can be delays between the date of damage and the date when all necessary approvals have been received to start reconstruction.

Norris warned that there may be a considerable delay associated in moving back into premises, getting new supplies, and attracting a new customer base.

“Cover does not automatically cease when the building, or other damaged property, has been repaired or replaced. It will continue, subject to the indemnity period selected, until the results of the business are no longer adversely affected,” he explained.

“The period required will depend on the circumstances of each business but because maintenance of income is a primary consideration to owners and employees, the period selected should not be so short as to create a risk of business failure through shortage of cash-flow in the final stages of the recovery process,” added Norris.

“It’s useful to also consider any lease requirements if the business operator is a tenant, in terms of liability for rent and other outgoings.”

Talk to an expert broker

As business insurance experts, brokers can find the policies that best meet your business needs. How do they work? They’re best described as licensed individuals or firms that serve as intermediaries between insurers and business owners to negotiate insurance policy contracts.

Brokers are often viewed as professional trusted advisors and can offer strategic risk management for business. So how do you find a good one?

How to buy business insurance

Business insurance is bought through brokers. If you don’t have a reliable personal recommendation, the National Insurance Brokers Association (NIBA)* can help you find an accredited broker.

When you’re choosing a broker it’s wise to check their credentials and determine whether they’ll be a good fit for you.

*The brokers on this site are not employees or agents of QBE, but are independent entities. QBE is not responsible for any advice provided to you by any broker on this site. Any such advice is the responsibility of the broker concerned.