Continuity is critical in business, and there are few things more important than continuous cash flow. A brief business interruption can be incredibly costly and long term shutdowns can see businesses fail even after an insurance claim is settled.
This is where Business Interruption insurance comes into play, protecting your cash flow against a variety of interruptions, including damage to your facility, equipment damage, natural disasters and more recently, cyber attacks.
Unfortunately, Business Interruption policies are often setup incorrectly leaving business owners frustrated at having paid years of premium for an insurance product that appears to work so poorly.
After significant fire damage to a local manufacturer’s facility, they make an insurance claim to rebuild and for the downtime while the rebuild is underway.
Their Business Interruption insurance has a standard, off the shelf indemnity period of 12 months. This is the length of time that the Business Interruption policy will pay for the revenue that is impaired or has ceased, so that continuing costs and profits can be paid.
With a recovering economy, area contractors are busy. But before any rebuilding can start, the debris from damaged parts of the facility need to be removed.
Once this has been completed, the rebuilding process is almost ready to begin. Before it can though, reconstruction plans need to be developed, tendering of building works and finding available contractors all takes time and often these are linear tasks.
Finally, everything has been approved, the groundwork laid and your chosen contractor is ready to begin the rebuild.
Even after property has been restored, it can take a significant amount of time for a business to win back lost customers, train new staff and integrate new equipment.
Another consideration is that if the interruption to your business results from a natural disaster or catastrophe, the recovery time can be prolonged due to stretched resources with many businesses seeking insurance and other solutions to mitigate their downtime.
Alberta natural disasters, including the Fort McMurray wild fire and High River flooding challenged local business owners to get back to business in an environment where everything took significantly longer than if each loss been an isolated event.
Your Indemnity Period must account for the maximum time it might take for your business to return to its former level of profitability.
Will 12 months be enough time for all the pre-work, facility reconstruction and earning your customers back all to get back to the level of profitability you were at before the fire?
A local fabrication facility had a significant claim forcing them to shut down operations. Reconstruction and equipment ordering is all on schedule.
Their insurance adjuster tells them that while their key employees; officers, executives and department managers will have their payroll paid, the rest of their staff will not be paid as part of the insurance claim.
If payroll is to continue for these team members until the business is back up and running, the owner will have to pay out of pocket.
When the facility comes back on stream, most of their team had moved to other opportunities and competitors. In this labour market, rehiring a complete team to run equipment is the straw that broke the camel’s back. Although insurance has rebuilt their facility and paid continuing expenses while they were down, operations cannot restart without a full complement of staff.
How can you ensure that your team is not at risk of moving to different employers during your downtime?
Ensuring that your Business Interruption policy provides Ordinary Payroll coverage adequate to pay for your entire team for the duration of a significant shut down will ensure that your team is in place and ready to go when your doors reopen. This coverage is purchased in 30 days blocks up to a full year of coverage.
If your team has union employees, there may be provisions in your contract requiring a paid notice period.
Unless modified, Business Interruption policies will provide no or limited Ordinary Payroll coverage. If you have not specifically discussed this with your insurance broker, you likely have a very limited amount or no coverage at all.
A local manufacturer purchased Business Interruption insurance to protect themselves from downtime for claims they might experience at their facility. Their process relies on raw materials they source from a supplier in Japan. Their Japanese supplier’s facility experiences significant damage from an earthquake and will not be able to provide their customers with product until they recover.
Although the local manufacturer tries to find other sources of raw materials, most other suppliers are maxxed out providing to their own customers.
They contact their insurance broker to ask about making a Business Interruption claim only to find out that in order to make a claim, their own facility must have been damaged by a claim.
Waiting for their supplier to get back up and running, many of their customers are forced to buy from their competitors. This together with difficulty paying continuing expenses not to mention forgoing the profits they had been enjoying, put this manufacturer in a difficult situation, unsure if they will survive this downtime brought about by a key supplier.
What could have prevented this downtime and subsequent reduced revenues?
Finding multiple suppliers of raw materials can assist manufacturers when one of their suppliers experiences downtime or goes out of business.
Additionally, their Business Interruption policy could have been setup to address downtimes from key suppliers or customers.
Contingent Business Interruption pays for continuing expenses and reimburses lost profits resulting from an interruption of business at the premises of a key supplier or customer. The local manufacturers Business Interruption policy would be triggered by physical damage to customers’ or suppliers’ property.
However, not only must your key customer or supplier have a claim, but your policy must be protected from the same peril that affected them. If you supplier in Japan is shut down due to an earthquake, your local policy must have earthquake coverage to ensure Contingent Business Interruption will pay your claim.
A local manufacturer is temporarily shut down from flooding. Good news, they carry Flood insurance and their insurance company has assigned an adjuster to oversee the contractor work to get them up and running as quickly as possible.
The manufacturer believes that if they are able to setup shop temporarily at another location, they can mitigate their lost revenues and most importantly, generate enough production to keep their customers and staff from moving to competitors.
However, this solution comes with extra costs and the business owner asks their adjuster if the insurance company will pay these extra costs to help them keep up and running. Much to their surprise, the adjuster advises that the insurance companies only obligation is to get their facility back to where it was before the flood.
Further complicating this, as other businesses were affected by the flooding, local contractors are slammed trying to get to everyone. As a result, this claim will take longer than if it was their facility alone that was damaged.
The manufacturer has no choice but to pay these extra costs out of pocket and by borrowing from their lenders. Recovery is now twofold, getting their facility back up and running and recovering from the expenses they had to pay to continue working elsewhere.
Mutual or reciprocal aid agreements for manufacturers with unique equipment or facilities can be invaluable when facing significant downtimes.
From an insurance perspective, Extra Expense insurance is designed for businesses that need to keep running even while they’re recovering from damage. It covers extra expenses like re-locating to another building temporarily, costs to move equipment, utilities at a temporary location, additional freight costs for raw materials, temporary staffing solutions and more.
Having a long term lease on the building their facility is housed in, a local manufacturer enjoys a very competitive lease cost. After their building is significantly damaged by fire, they will have to find a new space. Not only will they have to find a facility to can meet their needs, lease rates have gone up significantly compared to their current lease. This unanticipated extra cost has put additional strain on their cash flow, already having to deal with downtime and a relocation.
Leasehold interest insurance covers the loss suffered by a tenant after termination of a favorable lease because of damage to the leased premises. This will pay the difference between a new higher lease rate over that of your current lease cost for the duration of your original lease term.
Business Interruption insurance solutions are often not customized to each buyer’s needs. If your insurance broker hasn’t asked you about your specific needs, your Business Interruption coverage may have significant gaps in coverage only realized once you have an insurance claim.
A local manufacturing facility experiences an outage which is traced back to a utility box located just off of their premises. Although utility companies generally resolve outages quickly, this particular outage lasted a number of days. The manufacturer’s downtime was significant and they decided to make a claim on their insurance. The insurance adjuster advised them that they had no coverage because their Business Interruption insurance did not provide coverage for interruptions caused by off premises utilities.
Business Interruption policies are often sold as an off the shelf solution by many insurance brokers. If coverage is not tailored to your needs, resulting claims for downtime and lost revenues are often denied just because the right questions were not asked.
Service Interruption coverage can be added to a Business Interruption policy addressing downtimes caused by damage to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations, and equipment of suppliers.
The impact of the 2013 Calgary floods and the 2016 Fort McMurray wildfire was devastating to local businesses. During catastrophic events like these, insurance is only one element that can protect the ability of a businesses to survive.
Companies with Business Continuity Plans (BCP) in place were able to communicate effectively with employees and customers while companies without BCPs were left to react to events, in some cases when their customers needed them most.
Organizations should consider the implications of extended interruptions from catastrophic events when reviewing their Business Interruption insurance. For instance, the length of time to recover from these events is longer because an entire community is drawing on resources to get businesses back up and running.
Interruption by civil authority insurance replaces lost revenue when a business is not damaged, but is denied access to by order of a local government. Policies contain time limits which may be inadequate for catastrophic events.
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