Opening a business is an exciting and adventurous journey. You've planned, you've researched, you're an expert on your products and services, sales are flowing in and you're hiring additional staff. It seems like such a far off thought that anything at all can stop you now. Although unlikely, unfortunately there are some events that can cause your entire operation to come to a temporary pause - and it's important you're protected against that.
For instance, disasters like fire and floods can disrupt your business. In Canada alone, severe weather patterns destroyed business to the tune of $2.4 billion. As a business owner, how can you recover you losses?
Fortunately, you can get your business running again with a business interruption insurance cover. The policy helps business owners get back at their feet following a disaster. You will further learn about what it covers and its subcategories.
Few people are aware of this policy. Most businesspeople would start another business when their businesses fail after a disaster. However, that is costly since they have to raise funds to set up another business.
It is crucial for business owners to have this policy. To understand why to read the detailed guide here on the insurance cover.
Who Is Business Interruption Insurance For?
Anybody running a business, big or small, needs business interruption insurance. No business sector needs this policy more than others. Remember, all businesses suffer the same problems despite operating in different sectors.
For instance, power outages disrupt work in both the health and manufacturing sectors. In hospitals, incubators require electricity to run. As for the manufacturing industry, the workers need electricity to control the machines that process materials.
For the two scenarios, the sectors can close down if no intervention occurs. It means the clients will look for another hospital or factory.
What Does Business Interruption Insurance Cover?
For the insurance company to cover you, the disaster must affect your business such that it can no longer run. Again, we can talk of fire as an example.
If your company catches fire but doesn't interfere with your functions, your insurance firm will not compensate you. On the other hand, this policy will cover you if the fire destroys the facility.
Besides fire, the policy applies when your business stalls due to floods, earthquakes or burst pipes.
The insurance cover will not only compensate you for construction costs. It will also cover other expenses such as lost profits, taxes, payroll, rent payments, etc.
That means your insurance company will compensate you up until you get back your business running.
Types of Business Interruption Insurance
When a business faces interruptions, several hidden losses usually occur. As a result, different classes of the policy tackle those losses. Here are six classes alongside the losses they cover.
1. Extra Expense
In this coverage, the insurance firm gives the affected business a sum of money. The money helps keep the business afloat as they wait for their property to be repaired or restored. Without the money, the business would otherwise close down.
These funds are intended to cover the costs of paying employees and purchasing a temporary site to do business.
2. Monthly Earnings
Many employees would abandon an organization the moment it faces difficulties. If a business experiences financial losses, the employee knows the management will not pay them. Most would abandon ship at that point.
It costs $48,000 for a business to replace an employee. That becomes a loss for the company, so your insurance company will pay your workers a monthly salary to prevent them from leaving. Your insurance firm will stop the payment once your business begins to run.
3. Gross Earnings
Your insurance company pays you the gross earning you would usually make from your business for this coverage. However, your insurance company may not pay you the expected gross earnings.
It may happen when your insurance firm restores your building earlier than expected. The more the construction delays, the more your insurance firm pays you the expected earnings. Though the cheapest policy, it may not always meet your needs.
4. Gross Profits
In this cover, businesses have to reveal their gross profits to get compensation. However, small businesses do not need to disclose their gross profits. Companies that should show their gross profits include manufacturers and retailers.
Businesses calculate gross profits by subtracting the cost of goods sold from the revenue. You can even use an online calculator to simplify your work. Once you get the value of your gross profit, your insurance company will pay you the value until your business stabilizes.
5. Actual Loss Sustained (ALS)
The policy covers all the losses you can think of. It will meet expenses like rent, salaries, utility bills and property taxes.
If your insurance company finishes constructing your business, you will not begin to make profits straight away. You will need some time before you earn profits like you used to. Thankfully, this policy still compensates you since your insurance company will consider the slow earning period as a loss.
6. Contingent Business Interruption
Businesses suffer losses when a supplier or business partner pulls out. Let us use a juice factory as an example.
Juice manufacturers rely on farmers to supply them with fruits. If a farmer somehow cannot supply fruits to a particular juice factory, the management suffers losses. They will have to spend their resources looking for new suppliers.
If the supplier pulling out causes a business to end, the insurance company intervenes. The insurance firm will provide money to the business for the amount a supplier would normally give them. When the business finds a supplier, the insurance firm will terminate the compensation.
What's Not Covered by Business Interruption Insurance?
There are reasons why this policy may not cover you. For example, sometimes you may apply for this policy, yet you were supposed to apply for a different one. Let us give examples of such scenarios and other instances when your insurance company will not compensate you.
Here are some of the items this policy does not cover:
- Utilities like water and electricity bills. During repairs, the utilities have to be turned off. The insurance cannot pay for items not being used
- Floods or earthquakes since there are other policies for them
- Communicable diseases or pandemics like COVID-19, bird flu and so on
- Undocumented income which is missing in your business financial records
What to Look for in a Company that Offers Business Interruption Insurance
Some people focus primarily on low prices to choose an insurance company. While it is a good idea to request quotes to compare prices, there are other factors to think about.
Referring to online reviews is fast becoming the most popular for folks to gauge how good the insurance firm is.
If you notice more negative reviews than positive ones about a particular insurance firm, you may need to do a little more digging for another company.
Some people post reviews for the fun of it. Speaking to friends who work with a certain insurance firm is the more reliable option.
A playwright called Oscar Wilde claimed that wisdom comes with age. If you want to work with an experienced company, research how long they have been operating. You are likely to receive exceptional services from a ten-year old insurance firm than a two-year old one.
The old insurance firm will know how to tackle client requests. No problem will be too complex for them to handle.
Another thing to consider about the insurance company is their availability. For example, what happens when you try calling them over the phone? Does the company pick up immediately, or do they put you on hold for one hour? Disasters can happen at any time. Are they available 24/7?
An insurance firm that is slow to pick your calls will likely be slow in compensating you.
Another vital thing to consider is the insurance company's financial performance. You can look for their annual financial report. The financial information will indicate whether the insurance company makes losses or profits.
If it is showing losses, it could be a sign that the insurance firm is making poor management decisions. Also, an insurance company that consistently reports losses could be on their way to bankruptcy.
There is no standard cost for premiums businesses should pay. As a result, big businesses pay more premiums than small ones. For instance, small businesses may pay $40 monthly, while big businesses may pay tens of thousands monthly.
Another reason costs vary is the location of the business. For example, if a business is near disaster-prone areas, it will pay high premiums. Also, a business near an area with high crime rates will pay high premiums.
The nature of the business also determines how much of a premium they pay. For example, in a restaurant, the risk of fires occurring from the kitchen is high. As a result, restaurants will generally pay higher premiums than other businesses.
Lastly, the amount of revenue a business generates determines the premium price. A business that makes a lot of money will generally pay high premiums. Your insurance policy will need your financial report to determine how much premium they should charge you.
How to Save Money on Business Interruption Insurance
A common way businesses save money is by comparing premium prices with other insurance companies. Though a good technique, analyze what the affordable premium entails. Ensure it meets the needs of your business.
Another way businesses can save money is by buying a package policy. A package policy will contain other policies in addition to business interruption. Remember, businesses need many insurance policies due to the many risks involved.
It would be expensive for an enterprise to apply individually for each policy instead of applying for a package policy. Also, there is a chance you may leave out an insurance policy by mistake. With a package policy, you do not need to make the effort of remembering each insurance cover.
To save money, you can work closely with your agent. Your agent will advise you on ways to avoid disasters that may affect your business. Still, your agent can recommend what you can do when your business stalls due to a disaster.
For your agent to give correct advice, you need to inform your agent of each move your business makes.
Analyze the performance of your business annually. If your business has been making losses, it becomes expensive to pay the same premium amount. Once you realize you are making losses, you should inform your insurance company.
The insurance company will then adjust the premium prices to an affordable rate.
Also, to reduce premium costs, you can raise your deductible. A deductible is an amount a policyholder pays to the insurance firm to begin the compensation process. If you pay a small deductible, your company will continue to pay high premiums.
If you want to pay low premiums, then pay a higher deductible. But, remember, you only pay a deductible when you require compensation. It, therefore, makes more sense to pay high deductible amounts than high premiums.
Business interruption insurance is vital for your business. You do not need to fundraise to begin another business. However, if this policy pleases you, you probably want to get one.
At Insurdinary, we provide quotes for this policy from different Canadian insurance firms. Our quotes save you the hassle of going door to door searching for the insurance cover.
We also advise business people on the best insurance cover to take. As a result, you will devise ways of saving money in case of an interruption.