Taking care of business
The right business interruption insurance can mean the difference between a business surviving a significant event or closing down.
When it Comes to insurance, many small businesses focus on items like property damage, loss, theft and public liability. Yet these insurances don't automatically cover loss of earnings from external events, such as utility outages or supplier insolvency. This is where business interruption (BI) insurance comes in, but it's poorly understood and often neglected.
BI insurance 101
BI covers loss or damage to business profitability after a major interruption. to operations. It compensates the business for loss of net profits and covers operating expenses like wages and financing costs, along with recovery costs that might be incurred.
"BI cover is like a personal accident policy for your business" explains Professor Allan Manning, managing director of LM Group. "If the business has an accident, it can continue to pay its bills, due to the cover provided."
Avoid the downside
Even where a business holds BI cover, underinsurance is common. Either the level of cover Selected is too low or the duration of cover is too short, potentially leaving the business without sufficient insurance for the entire recovery period. When businesses are underinsured, they're subject to the averaging clause, used by underwriters, which means claims can be adjusted down.
Let's say a business's income is valued at $2 million but is insured for just $1 million. In the event of a claim for lost income, the underwriter deems that the business assumes a proportion of the risk, even where a claim amount is less than the limit. So, the underwriter will only cover a proportion of the claim, less any excess. There is some leeway, as most quality Bl policies allow up to 20 per cent tolerance; however, not all offer this.
The example, below left, by Professor Manning shows how a claim is calculated and adjusted on a policy with a 20 per cent tolerance and a $20,000 excess.
Sum insured: $1 million (insurance limit selected)
Risk value: $2 million (amount that should be insured)
Claim amount: $250,000 (amount of business loss)
The insured business will need to fund the remaining $113,750.
A role for accountants
Accountants need to ensure their clients are aware of the importance of having BI cover. They should be providing critical financial data to support their clients' decision on Bl insurance and can assist in calculating limits.
Accountants can also facilitate an annual review of clients' B limits and cover duration. Increases to business value or changes to supplier relationships, operating costs, asset replacement or import costs can affect Bl insurance limits.
Working with the accountant and client, a specialist broker can help businesses choose the best level and duration of cover required, as well as manage the claims process.
Brokers know what to claim and, anecdotally, their success rates are : higher than in cases where clients claim directly from the underwriter.
Accountants understand their clients business model and financials; - brokers are the insurance specialists. Accountants are ideally placed to drive collaboration between the client accountant and specialist broker.
This approach yields quality advice enables information to be shared and gives the client the expert guidance needed to decide a business recovem plan and the right Bl insurance.