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Business Interruption Insurance - Getting the Indemnity Period Right

Business Interruption Insurance - Getting the Indemnity Period Right

Business Interruption Insurance can be what stands between the collapse or survival of your business following major loss such as a fire, flood or storm.
As important as getting the sum insured right is ensuring that you have the right indemnity period for your business.
This article will help you understand the factors which should influence how long a Business Interruption Insurance indemnity period your business needs.

Once you have decided upon which basis you will be arranging your Business Interruption Insurance (Loss of Gross Profit, Loss of Revenue, Increased Cost of Working, Additional Increased Cost of Working etc.?) your next key decision is selecting the correct length of Maximum Indemnity Period.

The Indemnity Period is the period during which the business' results are affected due to the loss or damage, beginning with the date of the loss or damage and ending not later than the Maximum Indemnity Period.

The Maximum Indemnity Period is stated within your Policy Schedule. Common Maximum Indemnity Periods are 12 months, 18 months, 24 months and 36 months.

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When deciding upon the length of the period you need to work out how long it would take your business to recover back to today's trading levels following a Fire, Theft or Flood.

Factors that you need to consider include:

  • What would your customers do if you were unable to supply them? Would you be able to sub-contract the work so that they are still looked after or would it be likely that you would have lost them for good? How long will it take to replace them?
  • If your buildings were completely destroyed how long would it take to get them rebuilt and the business trading again? You must bear in mind the length of it would take to get the site cleared, architects appointed, plans drawn up, planning permission agreed (if you are in a Listed Building) this could take a long time), contractors appointed before the works could even start...
  • Is your trade seasonal? How long would it take to replenish your stocks following a loss?
  • How long would it take to replace or repair your Machinery & Plant? Some specialist pieces of plant can have a delivery lead-in time of six to eighteen months, and then need to be installed and commissioned. Are spare parts for the machines readily available? Would you have to rely upon a specialist firm to carry out the repairs and if so how long would you have to wait for them to be available to carry out the work

Sadly there have been plenty of examples where businesses have not been able to recover from a large loss due to the inadequacy of their Business Interruption Maximum Indemnity Period and cases where the rebuilding works have not been completed before the period has expired are not unknown.

Business Interruption Insurance can be a complex area. You need to get the cover basis, the sum insured and the maximum indemnity period correct to help your business to survive a major loss.

I hope you have found this article useful and it will help you when considering the length of the business interruption insurance maximum indemnity period most suited to your business.

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Subrogation:
An insurance carrier may reserve the "right of subrogation" in the event of a loss. This means that the company may choose to take action to recover the amount of a claim paid to a covered insured if the loss was caused by a third party.