Many companies have crumbled under the weight of their own infrastructure when their revenue stream slows to a trickle.
But just because your business comes to a halt doesn’t mean your expenses vanish, as well. If your business is interrupted, are you prepared so that interruption doesn’t lead to the demise of your company?
“Business interruption can lead to catastrophic losses,” says Philip Reardon, director of Aon Risk Accounting Management and Administration. “Unless you have adequate insurance that has transferred the risk to insurers, it can leave a heavy impact on the balance sheet and ultimately lead to the failure of an organization.”
Smart Business spoke with Reardon about how business interruption coverage can protect your company in times of crisis.
How does business interruption coverage work?
It’s essential to understand that BI coverage is a component of a property policy, which covers the physical assets of an organization and the business interruption element that goes with it.
In order to have a business interruption claim, your property policy must be triggered by physical damage to an asset. Damage triggers the policy, and as a result of that damage and its impact upon the business, BI coverage comes into play.
There are two components of BI coverage; the first is a loss of gross profits, and the second is an extra expense component. The loss of profits component covers the revenue of the organization, less any variable expenses that may cease during a period of interruption. Its purpose is to protect the bottom line. Gross profits coverage is designed to cover all the fixed costs that continue on in the event of a loss, plus the net profits of an organization. Rather than generate revenue from the sale of products, for example, the insurance company will pay the gross profit element and those costs will be covered.
In addition to that, there is an extra expense element to the policy that covers the additional costs associated with trying to mitigate that loss of revenue.
What are some expenses that occur as a result of business interruption?
There are several fairly common expenses. If your organization recently had a major fire and leased temporary premises, the extra leasing cost is covered under the policy. Also, if an organization has more than one manufacturing site and loses one, there may be the opportunity to increase the production coming out of the remaining sites. You can work around the clock at those remaining sites and ideally maintain the same level of production. Obviously, there is additional cost and labor associated with the increased production, and those costs are covered under the extra expense component.
Some organizations may be faced with the opportunity to contract with a competitor. If competing companies have a fairly amicable relationship, they may have an agreement that if one has a business interruption, the other will help out. This gives a client the opportunity to continue to manufacture its product and maintain its customer base. But certainly the competitor will make hay while the sun shines and charge you a premium to use its facilities and equipment. If it does that, the additional cost of going to a competitor is covered under the extra expense component.
