There are many interruptions in life, some are good, some are bad. Children interrupting you, although cute, can be slightly annoying. Someone who is talking to you is interrupted by their cell phone ringing; quite common. An unborn child coming sooner than the expected “birthdate;” exciting, terrifying, all the emotions. A Tornado deciding to drop by and remove half of your barn & re-locating your livestock; slightly inconvenient. Or a boiler explosion in your manufacturing plant. “Heads up!” These are scary scenarios that can cause some serious disruption in your day to day and can interrupt your business workflow.
What can be done?
The first few scenarios can be handled by adjusting your expectations. For the later two, you might need an actual game plan. Typically, people insure their buildings, equipment, tools, vehicles & finished products (stock) and that is mostly what they are concerned with. However, there are many businesses that would be in serious trouble if they do not insure for “business interruption.”
Okay, so what is this “business interruption” coverage?
Business Interruption Insurance covers the loss of income that a business suffers after a disaster. Despite insuring the assets of your business, you may be unable to continue your business operation for 6 to 12 or even 18 months after the loss. While the demolition/rebuild is underway, you are continuously losing revenue. The unfortunate part is that you will likely continue having expenses throughout this time: Payroll, Mortgage, Taxes, Other business Loans, Utilities, etc. Now, if you aren’t able to bring in revenue, how will these expenses get paid? This is when business interruption coverage kicks in.
There are different types of business interruption coverage terms to keep in mind:
- Gross Profits Form – This covers the loss of net profit following the reduction in revenue, standing charges and any increased costs of business. For example, you need to rent a building or equipment to continue business operations temporarily. This is suitable for businesses in retail & manufacturing sectors.
- Gross Revenue Form – This covers the reduction in revenue following the loss and any increased costs. This is suitable for businesses in the service industry – accountants, solicitors, hotels.
- Actual Loss Sustained – This covers the actual loss sustained by the insured as a result of the physical loss insured by the policy. This only applies when the insured actually sustains a business interruption. If he is able to continue operations immediately following the loss, this coverage does not kick in.
- Extra Expense – a necessary expense that the insured was required to make, to prevent further damages in an unexpected loss. For example, you have a sewer backup and you quickly react by buying a sump pump, rent a hydro vac and other expenses to prevent the sewer backup from hitting your mechanical room and equipment therein. If sewer backup coverage is on the policy, the loss is covered and the costs to prevent further damage will also be covered under this extra expense provision.
- Period of Restoration – this is to determine how long your business could be down during a loss; aka: “Worst Case Scenario.” With this timeframe in mind, the value of business interruption coverage can then be calculated.
So let’s use an example:
You have a kitchen-cabinet business. You generate $600,000 Gross, annually. Your shop value with debris removal is $500,000. You have $200,000 in tools and equipment and $150,000 of pre-finished cabinets finished inside. You have purchased a comprehensive contractors policy with business interruption and data recovery. Some dust catches fire by the saw in the shop and burns down the shop, equipment, tools and pre-built cabinets. As predicted, the main items are insured and covered on the policy. You’re now looking at how you can continue business while your shop and equipment is rebuilt/re-ordered. The expected timeframe to get the debris cleaned up and another shop built and operational is 12 months. Two months later you are able to find another shop in town to rent use their tools. This coverage extends to the time you were down without any income while searching for the shop. It covers the rent payments for the rented shop/equipment and it covers any additional business costs that are required to continue business operations as usual.
- 2 month down = $100,000 revenue lost to cover cost of expenses (Payroll, Mortgage, etc.)
- Shop/Tool Rental is $7000 per month for 10 months = $70,000.
- Additional costs to transport products to/from rental shop = $10,000
- Debris Removal Costs = $20,000
- Shop Rebuild = $480,000
- Cost to replace tools & equipment = $200,,000
- Inventory/Stock = $150,000
- Data Loss / Recovery (Accounts Receivable, Payables, etc.) = $25,000
Total insurable loss = $1,055,000 Total business interruption loss: $180,000
So who needs this coverage?
This is decided on a case by case basis. Not every business is the same and therefore the risks are all different. You may have a welding shop or be a mobile welder, and so one may require this coverage and the other may or may not depending on his circumstances. It is important to be as thorough as possible when explaining the nature of your business to your insurance broker, this will help us design the coverage that will best fit your business. We do not want you left stranded in a pile of ashes with bills piling up. We are here to help bail you out of those terrible situations. Being detailed with us, helps us to make sure those loopholes are filled.
When tragedy or crisis hits, the last thing you want to be worrying about is where are you going to find your next paycheck. Let us take care of those details for you so you don’t have to. As always, thanks for reading and take care!