When discussing Business Interruption insurance, you will be asked for your “Sum to be Insured” or “Declared Value”. It is important that your “Declared Values” are as accurate as possible, as your premium will be calculated using these figures (regardless of the sum insured the recommended product will provided).
This is the most complex sum insured to estimate or accurately calculate, and is increasingly the cause of disputes between policyholders and insurers, largely due to policyholders using figures from past years rather than projecting into the future.
Any claim to be settled by an insurer will be done so by the insurer looking at the policyholder’s up to date Accounts (possibly even looking back over the last two or three years of Report & Accounts) to see how the business was growing, and expecting to grow in the future, as a guide to calculating a fair settlement. They will also take into account any contracts secured (but not yet started) and then lost as a result of the incident. They will also look at any contracts already under-way, but not yet accounted for.
The sum to be insured should represent no less than the financial projection for the financial year commencing at the end of the selected Indemnity Period (referred to below as “the coming financial year”). For example;
for a 12-month indemnity period, the estimate should be where the business anticipates the income level to be in 24 months from commencement of cover,
for a 24-month indemnity period, the estimate should be where the business anticipates the income level to be in 36 months from commencement of cover, and so on
Calculation in this way ensures that, should a claim could occur on the last day of the proposed period of insurance and run into the next financial year, you should not be adversely affected by estimates which fall short of your business needs at the time of the loss;
The “Indemnity Period” should be chosen according to the maximum amount of time you feel your business income may be adversely affected by a Total Loss, before returning to a pre-loss level (normally available as 12, 18, 24 or 36 months).
Things to consider:
bespoke or production line machinery can take longer to replace and install, especially if manufactured outside the UK
If reliant upon a handful of major contracts, you may have to find alternative customers to replace those contracts should they place their business elsewhere during your down-time, and decide not to return once your business is back up and running,
older or non-traditional construction Buildings may require more detailed planning permissions or bespoke building materials, meaning longer to rebuild your property and thus delaying your recovery further,
specialist Stock or Raw Materials may no longer be available from the same supplier/s as before thus extending your claim period whilst you find alternative suppliers etc.
There are two main forms of Business Interruption cover, as follows:
1. Loss of “Gross Profits”
Please note that the “Gross Profit” figure required for insurance purposes is not the “Gross Profit” figure shown in your annual “Report & Accounts”, as your accountant will have made deductions in their calculations which are normally included under a Loss of “Gross Profit” claim.
The sum insured can be estimated by using the following “simple” calculation:
- annual turnover for “the coming financial year” less
- the anticipated value of Stock purchases during “the coming financial year”
A more complex calculation will be adopted by the insurer when calculating the claim, but the above “simple” method should ensure that the sum insured is sufficient to take into account any adjustment by the insurer, without being over-the-top.
2. Loss of Revenue
The sum insured is simply the estimated total fee income for the coming financial year (with no deductions).
You will note that the company “Wage Roll” is not deducted from either of the above calculations; this is because any valid claim would include those payments to staff to keep them “on your books” until you are ready to recommence business following a loss. If the “Wage Roll” was not included in the calculation, you’d be forced to lay off your staff once a claim occurs and hope they were still available to rejoin your business, or advertise for new staff (which would merely extend the duration of your down-time), once your business was operational again.
There is a Third form of Business Interruption cover, albeit a limited cover:
3. “Increased Cost of Working”
Provides cover in respect of those expenses incurred, following an insured event, in hiring temporary premises, hiring temporary office equipment, redirecting calls etc. This limited form of Business Interruption cover is more suitable to Office based professionals (such as Estate Agents, Insurance Brokers, Solicitors), where income generation is not reliant upon passing trade, manufacturing or the sale of Products. Cover is usually restricted to the Sum Insured, or a maximum Indemnity Period of 12 months whichever is exhausted first.
This cover can be further extended to include “Additional Increased Cost of Working” cover and is provided in addition to the “Increased Cost of Working” cover already included/calculated within your Business policy. The cover is typically Sum Insured based (and calculated exactly the same as the calculation method for the “Increased Cost of Working” cover) rather than being limited by Indemnity Period – especially suited to those businesses reliant upon time-sensitive contracts.
An extension to the Business Interruption cover can be purchased over and above the standard cover, and applies to the expansion plans you may have in the pipeline:
4. Loss of Advanced Profits
If you are thinking of moving to bigger or purpose built premises to cope with a new contract you have secured (or due to staff numbers increasing to cope with increased workloads), you may want to also consider “Loss of Advanced Profits” cover. If you new premises are damaged by an insured event before you get the chance to move in, you may find that you have to withdraw from the contract, or allow other contracts to expire without replacements being sought until such time as you are in a position to fulfil your expansion plans.
The “Loss of Advanced Profits” sum insured should reflect the value of those contracts which could be lost or lapsed, and the increased costs incurred, as a result of you not being able to fulfil your expansion plans following an insured event at the proposed new premises.