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february 2015 year
february 2015 year
Partner Katerina Shum

10 Important Aspects of Business Interruption Insurance

Partner Katerina Shum

This article focuses on significant extension which most insurance policies usually lack.

It has become a common practice to insure corporate property either to fulfil the requirements of the lending institutions or to secure the safety of one’s business. However business interruption insurance is often unduly left out of consideration in this regard. For instance, the insured losses of tragic 9/11 events under business interruption insurance policies turned out several times bigger than the ones indemnified under regular property insurance agreements.  

1. Who should insure business interruption?

Business interruption insurance represents important component of commercial insurance programs. This type of coverage is appropriate for real estate facilities or industrial sites, i.e. tangible types of businesses. It comes into effect once the damage has been done to buildings, equipment or other property which causes the interruption of business operations.

2. Which damage does business interruption insurance cover?

In a nutshell such policies imply that the lost profit and fixed costs including employees’ wages, principal and interest payments and other costs business is liable to incur irrespective of business interruption. Sometimes expenses needed to conduct operations at the interim facility are covered given this helps decrease the total sum of losses.

3. Can business interruption be insured without insuring property?

There is no separate business interruption insurance policy in Ukrainian market. It is always an addition to property insurance policy. The cause of the business interruption must always fall within the category of insured events under property insurance agreement. Thus physical damage is indemnified under property insurance agreement, and the losses caused by stop in operations are covered by business interruption insurance policy.

4. Will such insurance cover against turnover decline or deterioration of relations with business partners?

One should understand that interruption, slowdown or stop of business operations are covered by insurance only if they directly result from the physical damage to the insured property caused by an insured event in accordance with terms and conditions of insurance agreement. Business losses arising from unfavorable market conditions will not be indemnified.

5. How soon after the insured event does this insurance coverage come into effect?

The majority of insurance policies have the waiting period of 5, 7, or, in rarer cases, 10 and more days. That is called time deductible. It’s worth mentioning that the indemnity will not include compensation for the shutdown during the time deductible period.

6. Is it possible to receive indemnity for the shutdown period several years long?

Insurance coverage is not indefinite in time. The policy is designed to cover for the period of time necessary for the business to be rebuilt but normally – no longer than 12 months. If an insured facility is bound to take more time for complete restoration, the policy can be concluded for 24 months. Usually insurance company would expect the Insured to resume operations as soon as possible as well as take measures to minimize the possibility of recurring insured event in the future.

7. How is sum insured for business interruption defined?

All lines of operations which generate revenue should be considered when calculating sum insured. For instance, the owner of a commercial property facility should include not only lease but also revenue from media placement.

8.  Should the revenue sources be proven in order to receive indemnity?

In order to receive indemnity the Insured must prove the sources of lost profit and incurred expenses associated with business interruption. Therefore only legal revenues can be insured. If a business artificially lowers its profit in the books, insurance company will not be able to cover the lost profit in full.  

9. Does it make sense to insure business interruption with sum insured being much bigger than the actual possible revenues?

The statistical data gathered by the insurance companies prove that more than 50 out of 100 insured businesses with property insurance policies only significantly suffered from the repercussions of the insured event or even dropped out of the business altogether
If business operations are interrupted, the sum insured will not be the only benchmark considered when calculating the indemnity amount. The financial results of the company will be looked closely into and their dynamics will be analyzed. This will allow the insurance company to conclude whether or not insured financial expectations are justified.

10. Are there any statistical data in favor of business interruption insurance?

The statistical data gathered by the insurance companies prove that more than 50 out of 100 insured businesses with property insurance policies only significantly suffered from the repercussions of the insured event or even dropped out of the business altogether. Shutdown usually leads to losing established business relations, key employees and market place which is taken by the company’s closest competitors.

All of the above supports the conclusion that business interruption insurance combined with regular property damage insurance provides the reliable insurance coverage for the continuity of business.