Business Interruption cover is arranged to protect your loss of earnings and additional expenses incurred following a Material Damage loss. To ensure that you receive the full benefit of the insurance cover in the event of a claim it is critical to ensure that the sum insured and the indemnity period are correct.
The ‘Gross Profit’ sum insured is calculated for insurance purposes as follows:
‘The amount by which the sum of the annual turnover plus closing stock and work in progress exceeds the sum of the opening stock, work in progress, purchases, bad debts, carriage, packing and freight’.
Once you have calculated this figure you need to adjust this to allow for the indemnity period selected and also for anticipated growth of the business during the period of insurance itself. You should bear in mind that the ‘worst case scenario’ loss may not occur until the last day of the period of insurance.
If there are other costs that you feel will vary in the event of an interruption these can also be noted in the ‘Gross Profit’ definition. As with the Material Damage section, the Business Interruption sum insured will be subject to the condition of Average so that under-insurance will be penalised in the event of a claim.
The ‘maximum indemnity period’ is the longest period of time that insurers will cover the Business Interruption loss from the date of the Material Damage claim.
The indemnity period selected should represent the maximum time that can reasonably be anticipated for your business to be financially affected by an insured loss. Factors that can impact the length of the indemnity period include but may not be limited to:
- Demolition of existing buildings and site clearance
- Redesign, planning permission and tendering for new premises
- Reconstruction itself
- Replacement of equipment and specialist machinery
- Replacement of stock
- Restoration of supplier and customer base
It is important for a ‘worst case scenario’ to be envisaged when deciding upon an adequate indemnity period to ensure that the policy will provide cover until the business reaches the operational level that it would have achieved had it not been for the loss.
Whilst we are able to provide guidance on how to assess the sum insured and indemnity period, we cannot advise you on what may be a suitable period for your business as this can vary widely from one business to another and even between businesses in the same sector. Therefore, we do not accept any responsibility for the adequacy of your indemnity period or sum insured. You may wish to consider obtaining suitable professional advice in this respect.