How to calculate your business interruption insurance

Business Interruption Insurance is required in addition to standard business insurance cover and protects your loss of earnings and additional expenses incurred following a material damage loss to your business and/or its contents. To ensure you don’t end up under-insured it is critical that the sum insured and the indemnity period are correct. So how can you make sure you calculate your business interruption insurance correctly?

With so many unknown factors, risk managers should anticipate the worst possible case scenarios in anticipation of loss. You don’t want to be left in the situation where your loss continues but the claim is cut short. The basic calculation will involve calculating your business’ gross profit and adjusting this to allow for the indemnity period and for any anticipated growth of the business during the period of insurance itself.

Here are some tips on making sure that your business interruption insurance is calculated correctly.

Get the indemnity period right

Settling the maximum indemnity period is one of the major business interruption insurance areas causing issue and resulting in many businesses going under following a disaster. Standard insurance policies will pay until the property is reinstated. However, policies should be evaluated to determine if there is a time element period and whether it includes reinstatement and recovery of profit and incurred increased costs.

If a business’s recovery ends up being delayed in any way, perhaps due to planning consent for example, then you can end up underinsured. It is important to cover for any such possible delays. Calculating the indemnity period will of course depend on the size of your business and the sector that you operate in, but it is recommended to start with the worst case scenario in terms of possible disaster, and work backwards. When considering the indemnity period you should ideally be looking at a minimum of at least 24 months, possibly 36. The reinstatement period needs to cover the time to rebuild as well as lead times to obtain new equipment, stock, reinstate suppliers, to cover recruitment and staff training, as well as time to win back old customers and build back a solid customer base.

Don’t miscalculate the gross profit

The definition of gross profit in an insurance policy is different to that of an accountant or other business people. Accountants tend to show gross profit after the deduction of purchases and would strip out staff and utility costs. For insurance purposes you need to include these items to avoid any unpleasant surprises. It is also important to calculate for expected changes in inventory values, materials, freight costs, etc. over the indemnity period.

Adjust for future business trends

As a business interruption insurance policy aims to recover the business to the same position had the event not occurred, then you need to consider possible future growth. Perhaps your business is predicted to grow by a certain percentage over the next couple of years, or you were starting to export to a new country or likely to win a large contract. When calculating the amount of cover required for business interruption insurance then all of this needs to be considered and documentation of proof of growth provided.

Calculate the cost of moving

Some businesses will be able to move to temporary premises during the reinstatement period. Any additional costs that may be incurred here need to be considered.

Calculate any expected saved expenses

Some businesses may be unable to operate during the period that the premises are reinstated. In these instances it is important to calculate any savings that may occur such as maintenance, building services, utility bills, etc.

Don’t forget the wage roll

If your business wants to retain some key staff then you will need to remember the continued wage roll and employee benefits required to meet these ongoing costs. Or if you are able to continue operating at alternative premises you may also need to take on additional staff to help with the clean-up and transition process.

How much of your company’s operations rely on another entity?

Think about how disruptive it would be to your business if an important customer or supplier’s premises or transportation was effected. Or if you rely on utilities for the running of your business. In such instances you may need to consider additional contingent business interruption insurance to ensure you are covered financially. Contingent business interruption is extremely challenging in terms of putting together the documentation and ensuring you have the correct wording in place, but can be well worth it for those businesses who are reliant on others.