Business interruption insurance: what all businesses can learn from the riots
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The latest riots and looting in South Africa have been utterly devastating for local businesses. When the dust eventually settles, the reality is that many businesses are going to have a tough time bouncing back from the destruction. Those that are able to pick up the pieces will be the ones that have business interruption insurance in place.
Business interruption (BI) refers to any event that stops a business from trading or generating an income. Typical examples include fire, flood, explosion, theft and looting/vandalism, as in the case of the widespread destruction that is sweeping across KwaZulu-Natal and some parts of Gauteng.
Business interruption insurance covers a business against the loss of revenue and helps it to get back on track in terms of paying overheads and expenses during downtime.
Traditionally, if you had a factory and it burnt down, there was a policy to cover the losses. In today’s world, many other factors that can cause your business to shut down. BI can be expanded according to one’s industry and business requirements, such as:
- Cybercrime, political uprisings, sanctions
- Intellectual property – E.g. prototypes/concepts/competitive advantage
- Illness, injury, disability or death of a key person in the business – E.g. CEO, partner, etc.
Understanding BI insurance
BI is a catastrophe type of risk, meaning that it doesn’t happen often, but if/when it does, both business owner and risk advisor need to ensure that they are prepared, and that the insurance policy will respond appropriately. Other catastrophe risks include damage to property and liabilities.
You need to consider all your risks and identify what can be managed and insured in your BI plan.
BI and material damages:
BI is impacted and linked to material damages to your business. This means that your material damage cover needs to be accurate and suitable for the business. For example, if your factory burns down and you are only covered to rebuild a portion of it, your building insurance will affect your BI insurance since it doesn’t adequately cover the replacement/reinstatement requirements of the business.
It is important to understand the seasonality of businesses. Losses during a certain time of year will not always affect every business the same. If a loss happens in peak season, you need to account for it.
By way of example: A farmer’s storage facility burns down. He has no stock and needs to look at other options. Does he source stock elsewhere and repackage it with his own branding while he rebuilds? Does he supplement the loss by harvesting other crops? Or is he in a position to wait until the next harvest season? The costs thereof need to be considered as well as downtimes that may occur that will impact on rebuilding and restocking of goods.
BI affects anyone who is in business, no matter how big or small. BI happens infrequently, but if it is not done correctly, it could affect the financial stability and ongoing viability of your business.
Not only do you need to know and understand your risks, but also those of your clients and suppliers. Ask yourself what do their business interruption plans look like, and what, from those plans, do you need to include and account for in your own BI plan?
Your BI plan should be revisited annually, or as your business changes – and with your risk advisor – ensure you are adequately covered and have considered all your risks efficiently.
These catastrophic events illustrate the importance of having a solid BI insurance policy in place.