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Cover Explained

Business Interruption

Cover explained, plain talking. No jargon

Business Interruption Explained

Business interruption needn’t be complicated and with this article we will try and get you up to speed on how this should be calculated and what factors you should consider.

For our clients, the predominant way of calculating the Business Interruption (BI) sum insured is to use the Gross Profit figure. The insurance gross profit figure is not the same as the accounting one.

The usual formula used is:

  1. the sum of the turnover and the amounts of the closing stock and work in progress at the end of the financial period shall exceed
  2. the sum of the amounts of the opening stock and work in progress at the start of the financial period and the amount of the uninsured working expenses.

The intention of BI cover is to allow your business to make a provision for loss of profits following on from a physical loss as well as giving you a chance to get back up to speed and regain your market share.

It is assumed that to do this you will not need to insure expenses known as ‘Uninsured Working Expenses’

What are ‘Uninsured Working Expenses’?

These costs are also known as variable costs and are those that change directly in line with turnover. These are the costs which you will not incur if you are selling. This could be your casual sales force or the costs of electricity that your factory would normally use if you were producing.

IMPORTANT: if you are in doubt, do not remove any expenses if you are in any doubt at all. Its better to be over insured than find out you do not have enough cover in the event of a loss

Indemnity period

This is how the amount of time you believe that it would take your business to get up and running again. In my opinion, this is often underestimated. Consider the following:

  1. Think of the size of your building and how long it takes to build even a new build house. The usual rule is that the larger the premises, the longer it will take.
  2. Is your building listed or in a conservation area? This will prolong the period it would take to reinstate your building.
  3. Will you need planning permission? How long will this take?
  4. How quickly will you be able to start the rebuilding? Chances are you will need to clear the site and obtain permissions.
  5. Do you have special machinery which may have a long lead in time?
  6. Do you have any large suppliers or customers? If so you may need additional time to regain your market share

Always aim high when estimating this without the help of a professional.

The usual periods our clients choose are between 12 months and 36 months but it could well take longer to get you back in business.

Increased cost of working (ICOW) and additional increased cost of working (AICOW):

For many business, especially office risks, ICOW may be a better way to insure as essentially, following on from a loss, they may be able to relocate to another office, restore systems and continue trading with little interruption.

AICOW, also known as uneconomic ICOW cover. Is different and recommended for clients who would not want to interrupt supplies to their customers.  Rather than give you the technical explanation here is an example:

An ice cream factory insures 1M of AICOW because it knows that if it fails to provide their major customers with ice cream, even after a loss, their customers would go elsewhere and they may never get them back. For this reason they are prepared to pay more to one of their competitors to produce ice cream on their behalf so that they do not lose their customers. What good would it be to have a business that is up and running but has no customers?

Business Interruption calculator

Movo have created a basic business Interruption calculator which can assist you in working out what sum insured you should use.

I would like to find out more

Give us a call, we provide free advice to all so give us a call and we will be delighted to help.

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