The Magic of Business Interruption Insurance
Part 2 – Establishing your Indemnity Period
Do you know how long it takes to recover your market position after a crisis hits your business? Weeks, months … years? To get your business back on track, win those valuable customers back and ultimately achieve business growth, you may be surprised at how long it actually takes to recover. Which is why knowing how long your insurance indemnity period should be is so important…
In my previous post How To Calculate Your Gross Profit – I illustrated how to calculate your GP figure. But that is only half the story. The second essential element of business interruption insurance is checking that the length of your indemnity period is adequate – crucial when ensuring that your business is protected for the recovery duration. The last thing you need is for the insurance payments to stop before your business has reached a sustainable point.
Indemnity Period explained
The Indemnity Period (IP) is the length of time it takes for your business to recover to where it would have been had the loss not occurred. The minimum period under many policies is 12 months, but in reality this is nowhere near long enough to recover from a serious loss such as a fire. In fact, the British Insurance Brokers Association now recommend a minimum of 24 months for your indemnity period.
Don’t get caught short!
Once the expiry of the indemnity period is reached, all benefits being paid under the claim cease. This can have a serious impact on the recovery of your business. For example, your premises could have been rebuilt, but re-establishing your market position is taking time. You need to win back existing customers or find new ones. So your indemnity period needs to be long enough for the insurers to continue providing cover for your lost income while you regain your market position.
Factors to consider…
Here are some points that need serious consideration when calculating the length of your IP:
- Repairing/rebuilding your existing premises – how easy will it be to rebuild? Are there any special construction features or planning issues? And how long would it take to clear debris?
- Could Health & Safety enquiries delay the rebuild?
- Alternative premises – would you relocate elsewhere?
- Availability of raw materials – how quickly can your stock be replaced?
- Availability of replacement machinery – is your machinery bespoke/specialised? How long will it take to obtain and install replacements? Will new and old machinery integrate where there are partial losses?
- Do you need extra time to retrain staff on new machinery and processes?
- Recovering your market position – will customers buy elsewhere? How long will it take to replace them or win them back? The Indemnity Period needs to allow for full recovery.
- Is your business seasonal? If a loss occurs just before the season starts you may miss more than one season, so an IP of 12 months is definitely insufficient.
- Management/decision time – the whole process of dealing with the claim and making decisions relating to the recovery of your business will be time consuming.
Giving some thought to these factors will help you establish a more realistic picture of the IP needed, as well as prompting some questions to be considered in your Business Continuity Plan (BCP). We’ll cover the benefits of having a BCP in a later blog.
New risks emerge
This is a fairly simplistic view of BI insurance. As businesses develop, the risks they are exposed to also develop beyond the realms of traditional BI Insurance. There may be supply chain implications, particularly if materials are sourced overseas. Or a greater exposure to cyber risks, or perhaps a dependency on certain items of machinery whose breakdown could result in a serious interruption to the business. No two businesses are the same and the risks will vary, so it’s important to discuss these with your insurance broker.
Business Interruption insurance is still greatly misunderstood. Many don’t recognise the need for it or understand how it works. Quite simply, if you’re insured correctly, BI Insurance can save your business from going under and can help to rebuild all that you have worked so hard to achieve. Without it, you could lose everything. It’s a no-brainer really!
Put the magic into your business … protect it from a crisis with Business Interruption insurance through Spencer Insurance!
For further information on this or any other insurance query, contact me on 01235 868535 or email me firstname.lastname@example.org.