The Essentials of Business Interruption
Let’s Talk Business Interruption
Whether it’s for your home, car or personal health, we take out insurance policies to help us rebuild or recover from some unforeseen circumstance or incident. In the case of your business however, there’s a bit more you need to take into consideration.
When a home is damaged or destroyed, the occupants would probably be able to stay with family or friends until everything is rebuilt. An individual can rent a vehicle in the case of damage to, or loss of their car; and they can also remain at home on medical leave with pay, while recuperating from a health issue.
When it comes to your business, how do you account for the lack of earnings or revenue; the inability to pay staff; or the loss of business contracts due to the incapacity to provide a service to clients? After a fire, explosion, natural disaster, cyber-attack or machinery breakdown, your operations will be slowed if not completely halted; and this is where your business will be at its most vulnerable.
A Business Interruption insurance policy provides you with coverage for financial losses arising from an insured peril causing insured damage to an insured property. It also makes it possible for you to meet any contractual obligations which you might have undertaken prior to the disruption, by providing for extra expenses and additional costs which you may incur to continue operating, such as renting a temporary facility.
This short series will walk you through the reasons you should protect the long-term viability of your business with a Business Interruption insurance policy, along with what you need to know about it and how it works.
Why should Barbadian Businesses protect against Business Interruption?
Caribbean territories are greatly exposed and highly vulnerable to natural disasters, which means that our homes, businesses and lives are always at risk.
However, despite 89% of businesses in Barbados being exposed to loss of income from catastrophes, only 11% of these have put protection in place with the adoption of a Business Interruption insurance policy.
When one takes into consideration the fact that if a business suffers a slowing or halting of operations, thereby inhibiting its ability to earn revenue, financial obligations such as rent and other physical overheads, wages, payment for stock and supplies, among other costs become problematic. According to the 2017 Allianz Risk Barometer Report, the average cost of the lost of income is 36% greater than the actual damage to the property of a business itself.
It is for this very reason that 40% of businesses impacted by catastrophes do not survive. This number would be greatly reduced if these businesses had a policy in place that provided them with the financial wherewithal to continue operating following a disruptive incident, or at the very least, allow them to cover financial obligations until operations resume.
To understand the severity of its potential impact on a business, one simply has to look at the 2017 Allianz Risk Barometer Report’s list of top risks. Market developments, cyber incidents, natural catastrophes, changes in legislation and regulation, macroeconomic developments, fire or explosion, political risks and violence, loss of reputation or brand value, as well as new technologies, all ranked below Business Interruption.
To reiterate, risks two through ten can hurt a business, however, Business Interruption can destroy it. It therefore goes without saying that all businesses need to take it seriously.
Choosing The Bi Coverage You Need
Now that you understand the value and importance of Business Interruption insurance coverage, as well as the various types, how do you know what is right for you?
The first thing that you should note is that a Business Interruption policy should form part of your business’ overall disaster recovery and business continuity plan, which should be developed by following certain steps.
What is your business? What internal and external factors are critical to your operation? Who are your key partners? How exposed are you to natural disasters and other risks? What are your key operational costs?
Once you have answered these and other questions, the next step would be to write out an emergency plan detailing all the areas that would require immediate attention following an incident causing Business Interruption.
You should now be able to determine the type of coverage that is most suited to your business, after which a conversation with your trusted insurance broker is needed to help shape the Business Interruption coverage you need.
So let’s recap.
- A Business Interruption insurance policy provides you with coverage for financial losses arising from an insured peril causing insured damage to an insured property.
- The average cost of the loss of income due to Business Interruption is 36% greater than the actual damage to the property of a business itself. As a result, 40% of businesses impacted by catastrophes seldom survive.
- Different businesses require different types of Business Interruption coverage, the varying types being Standard; Contingent; Non-Damage and Data Driven.
- A Business Interruption policy should form part of your business’ overall disaster recovery and business continuity plan.
