In the final instalment of our guide to Business Interruption, Nicholas Marshall looks at tailoring your cover to best suit your needs.
To illustrate how to tailor your cover, we will use an example of a Removal and Storage company with a total gross turnover estimate of £500,000. We will then break down the turnover in more detail as follows:
- Storage turnover (including the transits of these goods into and out of store)
- Transit turnover (straight A to B moves)
- All other turnover
However, in this example, we will focus on arranging the cover on the total gross revenue without breaking it down. One of the benefits of breaking down the revenue between different categories would be in allowing you to have different indemnity periods for different categories. So, now that we have determined this, let us look into the things to consider and the calculation of the sum insured:
- How long do you think it will take your business to return to the level enjoyed pre-incident to be up and running after a major catastrophe? In this example, let’s assume that it is 36 months.
- What is your forecast for the growth of the business? Let us use 10% gross year on year for this example.
Therefore the growth projection over the Indemnity Period of 36 months with a Business forecast of 10% growth per annum would be as follows:
Year 1 – £500,000
Year 2 – £550,000
Year 3 – £605,000
Year 4 – £665,500
36 months Gross Revenue Sum Insured – £1,820,500
Calculation of Sum Insured
The sum insured is the total revenue for years two to four. The reason for using these years, and not years one to three, is that the indemnity period runs from the date of the loss, as explained in our earlier article. This means that if the claim occurred during Year 1 and there is a 36-month Indemnity Period, it could run into Year 4, and so by using Years 2 to 4 in our calculations, we avoid the potential risk of underinsurance in the Sums Insured.
When we arrange this cover, we should also consider the Additional Increased Cost of Working, which covers the increased costs incurred after a property damage loss, specifically to limit any reduction in turnover or revenue and to maintain normal business operations. We recommend this to supplement the ‘additional expenses’ cover.
If you suffer a major loss, there will inevitably be extra expense that will not necessarily pass the economic test for additional expenses but is still reasonable in terms of the medium and longer-term interest of the business. Examples include temporary repair costs or contracting work out to continue to supply customers. As there is no economic test to consider, another advantage could be quicker settlement decisions from the insurer or loss adjustor.
Assessing the sum insured is not an exact science, and you should gauge the additional costs you would incur if you had to relocate on a temporary basis. Some insurers impose monthly payment limits. If these apply to your policy, you need to assess what you will need in the first few months (when most additional costs are likely to be incurred) and calculate the sum insured from there.
Read more from our series on Business Interruption Insurance here:
PART 1: What is Business Interruption Insurance
PART 2: How to Calculate Business Interruption Sums Insured
PART 3:Business Interruption Insurance Indemnity Period
Interested to know more?
If you would like advice on tailoring Business Interruption Insurance to suit your needs get in touch here.
