Understanding business interruption insurance.
What would you rather after a disaster hits? Close down temporarily with the peace of mind that everything will be back to normal as soon as the business has been fixed and ready to re-open? Or have banks and staff breathing down your neck while you scramble to keep your head above the water?
The ability to keep your business operating, week in, week out, is the lifeline to your own financial future as a business owner. Whether it be paying the bills, putting food on the table, paying school fees, without a steady business income the future can seem pretty dim. Yet unfortunately this is precisely the situation that confronts thousands of Australians each year when their business income is interrupted by an unforeseen disaster.
Fact is, major events such as fires, storms and earthquakes can lead to significant and often long-term business interruptions. Without the necessary precautions, the loss of income in such instances can be crippling. In just one example, a 2014 American study (McGladrey & Pullen) found 43% of businesses never re-opened after experiencing a major loss, while a staggering 72% had subsequently failed within two years.
It’s findings like these that bring business interruption insurance into sharp focus. While most Australians know the value of property insurance and home and contents cover, statistics show far fewer are currently aware of business interruption insurance (sometimes also called business income insurance). Unlike property insurance which only covers the physical damage to a business, the core premise of business interruption insurance is to support your cash flow and profit while your premises are either closed due to a disaster event, or in the process of being rebuilt after it. In effect, it buys you time to get things back up and running by ensuring your financial position is not affected due to the loss that has occurred.
Under a standard business interruption insurance policy your business is typically covered for losses of gross revenue and increased expenses during the affected period, including:
- Loan repayments
- Supplier/employee costs
- Management of key customer accounts.
Nationally, the demand for business interruption insurance is on the rise, and understandably so. The question needs to be asked, how long could you survive before the clean up is done and you’re open for business again if you were affected by a disaster?