Enduring interruption: why indemnity periods are crucial to your business interruption policy

If your business faces a catastrophe such as a fire or flood, calculating the time it takes for you to fully recover can be troublesome, but it’s crucial you are as accurate as possible. Here’s why.

Enduring interruption: why indemnity periods are crucial to your business interruption policy

Every business is unique in how it operates. When a serious incident occurs, how your company reacts will differ from how others do. Such disasters can vary in consequence. It might affect you in a small way such as a particular product line or in a much larger way such a fire or flood and could even close down your business temporarily.

These types of incidents are often not caused by those it affects, so why should you take the hit? With the right Business Interruption policy, you won’t have to, but risking not having a policy means that your business could face what every business owner fears – total closure.

Closed for business

After an incident, the period of indemnity is the time from which a loss of profit or revenue first occurs until the time in which you get back to the same level as before the incident. A typical indemnity period might be 12 months, but you need to be accurate as possible when calculating the indemnity period you need.

There’s lots to consider when calculating this. How will your clients react? Can you sub-contract in the meantime? If your business premises need to be totally rebuilt, where will the new site be? Will planning permission throw a spanner in the works? If you have any stock left, where will this be stored whilst the rebuild takes place? What if the materials are difficult to source? Or your specialist machinery is no longer manufactured? You need to be pragmatic and realistic in your assessment.

Sometimes, civil authorities may close or deny access to your insured property due to a natural catastrophe. In these cases, ascertaining how long your business will be interrupted for can be challenging. It’s worth bearing in mind that if you estimate it will take 12 months to recover and in reality, it takes 24 months, you may be the one to cover any shortfall.

Sum insured

Equally as important is calculating the total sum insured. The sum insured is the amount you are insured for and will dictate the price of your premiums. You need to be meticulous in your calculations to ensure you have thought about everything.

This could include the cost of sub-contracting, rebuild costs, stock replenishment and repair, whether you are contractually obliged to pay your suppliers, staff inclination and whether they will opt to leave, cost of machinery, materials and many other things.

Business as usual

Once you’re back up and running, you can be confident that the cover your Business Interruption policy provided matches the actual losses your business suffered. Without accurately calculating these, you could end up paying far more than the overall cost because your insurer had to make a guess, or worse still, your policy could be void. In such an event, it’s likely that your business wouldn’t survive.

At Weir, we can help you to understand your requirements and source a business interruption policy which gives your business the confidence it needs. We’ll help to accurately determine the cost of your sum insured and the indemnity period you require to safeguard your company now and in the future.

For a full assessment of the health of your business, you may wish to take advantage of our free Business Health Check where we will identify the key areas of risk to your business and draw up a plan of action to get your business up to optimal fitness.