You can’t always be prepared for all eventualities when it comes to business. Things can happen that can’t be expected. These events, often totally out of your control, can have a serious and lasting effect on the finances of your business. So, what can you do?
A business interruption claim is designed to assist you to recover financially from any disaster or event that has seriously impacted your business’s ability to operate and make money.
This blog details how to calculate a business interruption claim, what business interruption insurance is, why you might need it, and more.
What is Business Interruption Insurance?
Business interruption insurance is a form of insurance designed to cover business income that has been lost in a disaster. When such an event occurs that damages a company’s stock, forces them to move locations, or halts their operations altogether, business interruption insurance can be used to cover lost finances and any costs incurred as a result of the interruption.
Your business interruption insurance can also cover:
- Damage to property
- Breakdown of key equipment
- Damage to supplier
The length of time that business interruption insurance will cover a firm is traditionally from the day the covered incident took place, until the date that the business is able to return to normal. Standard policies will generally offer coverage for up to 30 days, but will often accept extensions should the situation demand it. Since a payout from such a policy can often be vital for a company trying to get back onto its feet, it is essential to understand how to calculate a business interruption claim so you can ensure that everything goes through without a hitch.
What are the Main Causes of Business Interruption?
The cause behind a valid business interruption claim can vary depending on your individual situation, and are likely to be reviewed by a provider on a case-by-case basis. There are a few notable causes that are commonly covered by insurance providers across the board. These causes can vary from fire damage, to loss of connectivity and cyber threats.
As a business owner it is vital to know what you can be covered against. This is particularly important for any possible business interruption causes that could be specific to a business due to its location.
Fire damage is generally considered to be the most common cause of business interruption claims. In a study, Allianz Global Corporate & Speciality found that around 59% of all interruption claims were caused by fire and explosion.
Businesses are estimated to lose billions of pounds a year due to such incidents. The companies most at risk of damage by fire are those that deal with electricals, flammable liquids, and heavy machinery.
The increase in possible natural disasters around the world has also seen a rise in business interruption costs.
Natural disasters that would be covered by a business interruption claim would be flooding, earthquakes, wildfires, hurricanes, and more. Depending on your location, it is also possible for cyclones and winter storms to be covered.
A natural event affecting your business would be some form of disaster occuring that inhibits your firm’s operations and impacts possible trade.
Loss of Connectivity
Almost all businesses today will rely on the internet in one way or another. Some companies operate entirely online, some use equipment that needs connectivity to function, while others use online technology to keep track of what’s going on in the business.
In the modern business age, a loss of connection can impact a company more than nearly anything else. Events ranging from power cuts, web hosting supplier and date centre outages, and more, can cause a business to be unable to operate for a prolonged period of time. As a result, business interruption claims centred around connectivity issues are growing exponentially year on year.
Cyber security threats are one of the fastest growing business interruption causes today. The widespread adoption and reliance on technology in the business world have led to a growing importance in cyber security.
The risk of cyber attacks rises exponentially year on year as more firms shift their operations to focus more on technology than ever before.
Cyber attacks have the potential to totally wipe out a thriving company if not prepared for properly, and can cause a business to have to shut down in various means, from viruses, to malicious codes, and more.
Steps to Prepare a Business Interruption Insurance Claim
The most important thing you can possibly do to ensure that you have a successful business interruption insurance claim is to prepare. There are two crucial steps that must be taken, which are developing an appropriate plan and calculating the loss incurred.
Without preparation and due diligence your claim is likely to be rejected and you could be back at square one, in a huge financial hole. With this in mind, we have explained the two main steps in a bit more detail.
Develop a Plan
For any company wanting to make a successful business interruption insurance claim, it is pivotal that you internally come together to develop a thorough, detailed action plan. Some things you should be sure to consider in your action plan are:
- Review your insurance policy to determine your coverage
- Fulfill notification obligations to insurer
- If you feel it would help, find a legal professional to assist your claim
Calculate Business Interruption Loss
You will also need to calculate your business interruption loss. In order for your claim to be accepted, you will need to ensure that this calculation is correct and completely objective.
An important note to remember when you are looking to measure your business interruption loss is that you aren’t necessarily calculating the revenue lost, but rather the revenue lost compared to what you would have been expected to gain during the allotted period.
Things you need to consider when calculating your business interruption loss would be revenue and profits lost, as well as any business insurance losses accrued. If you are ever unsure about how to calculate a business interruption claim, it is a wise move to seek specialist assistance to ensure everything is done correctly.
How to Make a Business Interruption Loss Calculation
There are several key elements to making a business interruption loss calculation, including the time it took for your operations to return to normal, your expected revenue, and an estimate of your total lost revenue. Getting it right is vital to ensure you remain protected — no matter the circumstances.
Given the importance of the situation, it is a good idea to seek specialist assistance at your earliest opportunity if you ever become unsure. That being said, here are a few points you’ll need to consider:
- The first step when attempting to work out your business interruption loss calculation would be to evaluate policies and their indemnity period. Make sure that your provider will cover you for the duration of your interruption period. If you can, look for around 24-36 months.
- Draw a picture of the total length of time your business would need to return to normal day-to-day function. This should include estimates factoring in the time it takes to train any new staff, retrain key team members, obtain new equipment, getting important building regulations etc.
- Calculate the expected revenue your business would have earned had the incident not taken place using projections of the last 12/24 months of business. Things to take into account when working this out could be industry trends, the time of year, and growth of the business compared to previous years.
- Once this calculation is complete, it is important to go over the firm’s actual revenue. This would be revenue gained after the initial incident, up until the business is able to resume operation. Due to the knock on effect the incident will have had on the business, it is likely that any revenue accrued will be minimal.
- The next key statistic to work out is an estimate of the total lost revenue. To do this you should subtract the actual revenue from the estimated revenue.
- If relevant to your business, calculate the costs required for you to move your business into temporary premises. This figure should include finances such as rental fees, hiring of any necessary equipment, and allowances for staff to work from this new location.
- It is important to work out the expenses saved by your business during the period. These will be expenses usually incurred prior to the forced closure of your business. This will often include maintenance costs, utility bills etc.
- Calculate the expected payroll for each member of staff who may not be working throughout the closure. This should include wages, benefits, and compensation insurance.
- Finally, you should add up the total lost revenue, any costs accrued for moving to a temporary base, as well as expected payroll, and subtract the saved expenses. This should help you to get a better idea of the sum you need to be covered by your business interruption claim. Contact your insurance provider for a better understanding of exactly what coverage you have.
How Inquesta’s Business Interruption Consulting Service can Assist
If your business has suffered unexpected financial loss because of an interruption to your operation caused by something out of your hands, or you are unsure how to calculate a business interruption claim, we can help.
Inquesta have years of experience in supporting businesses going through exactly the same thing. We can provide a clear and honest insight into each aspect of your business and its finances to offer you a helping hand.
The expertise of the Inquesta team means that we are able to accurately calculate your losses, help to devise a detailed plan, assist with negotiations, and more.
The Inquesta team specialise in providing an unmatched business and financial management service. Contact our team, or request a free consultation today to find out more about how we can help you.