Emjay Insurance Brokers understand that one of the best things about owning a business is the level of control you can have in choosing the way to steer the company into the future. BUT, what happens when factors that you can’t control – such as fires, floods, supply chain failures or natural disasters – does it impact on your business? The answer is a big YES! In extreme circumstances, these could cause a company to close down altogether. But one way of protecting the viability of your business – and livelihood – is to protect it with business interruption insurance.
In straightforward terms, business interruption insurance helps businesses bounce back from a major incident by covering the loss of profits and expenses (including payroll, bonuses and financing costs) during the interruption. It’s an indemnity policy designed to put the business back as close as possible to the same financial position to where it was before the interruption occurred.
However, it’s thought that as few as 25% of Australian companies have business interruption insurance. As specialists in business interruption analysis, we think that is a worryingly low figure.
Here’s a classic example of business interruption insurance in action, which really hits home just how important it can be.
A Sydney-based client of ours is one of Australia’s largest manufacturers and suppliers of foam and plastic disposable cups, lids and food containers. In a toughening market, they were looking to reduce their amount of insurance cover several key areas – including business interruption.
We strongly advised against this. It’s a relatively high-risk industry and their premises and equipment were ageing. Without adequate business interruption insurance, a major incident could have had a devastating effect on their future prospects.
Happily the client took our advice because, not long afterwards, a fire ripped through their main factory. Luckily there were no injuries but the damage was extensive and all the manufacturing equipment at the plant was beyond repair.
The total cost of the claim was $26m. But thanks to a business interruption analysis, the results of which were factored into the insurance cover, the client was able to stay afloat. The majority of staff were able to be kept on, and their wages were covered by the policy. The loss of profits was off-set, too, ensuring the business was able to survive for the 12 months in which it took to become fully operational once more.
And where are they now? In larger, more modern premises, with state-of-the-art equipment. The machinery upgrades have helped reduce labour costs, making the business more competitive. It’s been a great outcome from a very sad event – and one that really shows the value of business interruption insurance, and of business owners having the confidence in their broker.
Business interruption insurance – factors to consider
This example ended positively because of a number of considerations:
- Assets were correctly insured for their replacement value through up-to-date valuations;
- Business interruption insurance policy had an indemnity period of 24 months – ensuring loss of profits were covered throughout the mammoth process of rebuilding. An indemnity period of this length is recommended. Even 12 months is rarely adequate protection for a significant business;
- Key staff were able to be retained and paid to assist with the rebuilding; and
- The business underwent a thorough annual review and insurance analysis each year. This is vital for businesses of all sizes to avoid underinsuring assets. Even with a business interruption policy in place, if you’re business is underinsured you will be out of pocket at claims time.
You can find out more about this example in our claims case study video. And if you feel that you would benefit from a business interruption analysis and insurance review, please don’t hesitate to contact us on 02 9796 0400. Your business is worth protecting, after all.