Business Interruption Insurance

Statistically, almost three quarters of businesses that suffer a major catastrophic event (like a flood or a fire) never recover. 43% never trade again and a further 29% go out of business within two years.

Fortunately you can easily protect your business from that sort of risk by insuring not only against loss of assets, but also against loss of profits whilst you get the business back up on its feet again.

Read on for our suggestions on what to insure for, and if you aren’t sure how much you should put in for “Business Interruption/Loss of Profits”, our practical “Bernie’s Cosmetics Factory” example will help you decide.

Catastrophes like floods and fires do occur and there is insurance to cater for these types of events. There are two different types of insurance cover for these events – one to repair or replace the assets damaged (your normal insurance policy) and one to compensate you for the losses incurred during the time it takes to get the business going again. This latter one is known as ‘Business Interruption’ or ‘Loss of Profits’ insurance.
Statistics show that nearly three out of four businesses never recover from a catastrophic event and it is therefore important to ensure that your Business Interruption insurance has been carefully thought through.

To watch a quick easy to explain video by Know Risk Network , click here  which is applicable to South Africa too.

pic: Know Risk Network

What to insure for
You need to have a good grasp of your costs and expected sales and gross profit. You don’t want to underinsure so if your business is growing reflect that fact – for example if you expect 10% growth (and trends in your business justify this) show this to insurers or you won’t get paid out this additional amount.
It is important to make sure that all your projections are well grounded and can be defended as they will be closely scrutinised by loss adjustors in the event of a claim. Thus, the better you understand your costs, the less chance of having a claim either rejected or adjusted downwards.
Another critical factor is the indemnity period. This is the time you will be covered for whilst out of business. For example, if you put a six-month indemnity period in your policy, you will only get paid out for six months even if it takes twelve months to get the business back on its feet again.

Let’s look at an example…
Bernie has a cosmetics factory and his year end is 31 December.

 Budget for Year  R
 Sales  120,00
 Cost of Sales  (45,00)
 Purchases  (10,000) **
Wages  (35,00)
 = GROSS PROFIT

75,000

 COSTS  75,000
 Salaries  (20,000)
 Distribution  (6,000) **
Maintenance  (5,000)**
Rent  (15,000)
= PROFIT

29,000

On January 2, the factory burns down. It will take 12 months to get the factory up and running again

Business Interruption Claim R
 ADJUSTED GROSS PROFIT  65,000
 Gross Profit  75,000
 Less Purchase  (10,000)
 COSTS INCURRED  40,000
 Salaries  20,000
 Rent  15,000
 Preparation Cost   5,000 ***
 =CLAIM  105,000 *

*Adjusted gross profit plus your incurred costs

**Variable costs which will not be incurred in the 12-month period of re-establishing the factory.
***Putting together claims is a time-consuming task, so include it in your policy.

NB! Include VAT in the assured amount as insurance pay outs include VAT.

You can see from this simple example that this is a very complex process – spend time with your accountant getting to grips with your revenues and costs. Also use a reliable insurance broker.
Remember that 43% of businesses that suffer a catastrophe never trade again and a further 29% go out of business within two years.

Article TGS South Africa 04 Sept 2018 www.tgssouthafrica.co.za

 

 

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.