Most SMEs and business owners around the world are familiar with Property Insurance. It covers liabilities caused by act of nature such as Flood, Earthquake, Hurricanes, Storms, Lightning strikes and the most common risk of all – Fires. Property Insurance typically covers damageto physical assets of the business. But what about the loss of business income, during the repair & restoration period?

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This is precisely what is covered in a Business Interruption Insurance (BII). Shockingly, very few SMEs around the world are aware of BII, as per a study conducted by Zurich Insurance Group. BII is broadly defined as a type of insurance that covers loss of income suffered by a business after a disaster, either directly due to the disaster, or due to interruption caused during the repair and restoration period.

 

What BII covers?

BII is rarely offered as a separate cover but treated as an extension of Property Insurance or Fire Insurance, as subscribed by the customer. Some Insurers offer a comprehensive Business Operations (BizOp) Policy which covers Fire Insurance and BII. A BII policy can cover one, more or all of the following.

• Revenue & Profits. This refers to the income your business would have generated during the closure period. Typically, this is derived from your past financial records.
• Rent/lease payments. Most leases or rental agreements expect the tenant/lessee to make payments in-spite of interruption to the business.
• Relocation. Considering the expense involved in temporarily relocating the business such as packing, moving and rental costs, a BII should cover this.
• Employee wages. To prevent employee turnover after a disaster, most business owners continue to pay wages during the restoration period, so the BII must cover this.
• Taxes. All statutory taxes and levies continue to apply in-spite of business interruption; else the business stands the risk of costly fines, penalties or even closure in some cases.
• Loan payments. Loan/mortgage payments are due every month, and since one cannot accurately predict when business will resume normally, it’s good to cover this under BII.
• Losses caused by inaccessibility to the building. Generally called "civil authority coverage" or "loss of ingress or egress”, this refers to any restrictions imposed by civil authorities for accessing your business pre mises and losses incurred thereby.
• Disruption: Service providers of power, telecommunications and water may not be able to restore service quickly which adds to the disruption and must be covered separately.
• Extra Expenses: If the fixed costs described above are not sufficient to cover the loss of income incurred, a reasonable amount can be marked as Extra Expenses.
• Commissioning & Training Costs. In the eventuality of a disaster, the business organization may have to use a different set of machinery in the interim. This involves expenses to commission such equipment and train employees on their usage.

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What BII does not cover?

It’s also good to know what BII does not cover so that there are no unpleasant surprises in the wake of a disaster.

• Undocumented Income: If your financial records are not detailed, you could miss out on a whole lot of expenses, as the BII strictly goes by your statements
• Partial closures: The damage caused by a disaster may be such that the business is not fully shut down but is partially affected. In such a case, the benefits of BII may not fully apply.
• Non-covered damages: If your property insurance only covers fire and not flood or earthquake, damages caused by such disasters are automatically exempted from BII.

Conclusion

A Business Interruption Insurance may appear like an additional expense to your business. But its utility is fully realized when there is a disaster. Avoiding the cost of a BII may become a case of being penny-wise and pound-foolish. To ensure that your business interruption insurance adequately covers your risks, it is important to work with specialist auditors who can provide you with an in-depth analysis of your insurance policy and help you identify any gaps in coverage that need to be addressed. Consult your Insurer who will work out the most optimum package as per your income and ‘perceived risks’.