Spate of national and international disasters highlight need for interruption insurance in SA Businesses

Western Cape farmers have recently been left drowning in financial outlay amounting to over R328 million in damages due to the recent winter floods, while heavy torrential downpours have also caused significant flooding in other parts of the country, forcing road closures on national roads.

Businesses in the agricultural sector are only one example of companies that have been negatively affected financially by unforeseen events and highlight the importance of having sufficient business interruption cover in place.

This is according to Jonathan Holden, Executive of Operations at Lion of Africa Insurance, who says financial damages caused by unforeseen events are increasingly taking local businesses by surprise, especially those that are not covered for major disruptions to their business such as flooding damage, power outages or inaccessible supply chains.

“Recent events that have impacted businesses globally include the outbreak of E. Coli in Europe, the Icelandic and Chilean volcanic ash clouds, and earthquakes and tsunamis in Japan. In comparison, South Africa’s main risks to business interruption have been fires, storms, flooding and droughts.

“Alarmingly, the latest statistics indicate that there have been seven ‘one-in-100-year’ floods in the Western Cape since 2003 and this figure is expected to increase in the foreseeable future due to changing weather patterns”.

Holden says that it is critical that local businesses consider insurance contingencies that are designed to put a business in the same financial position it would have been in if no loss had occurred.

He explains that Business Interruption covers businesses for a wide range of operational costs and services that they are highly dependent on. These typically include, among others, profits that would have been earned, fixed costs like telephone, electricity and other expenses regularly incurred by the business, salaries and wages, temporary relocation and extra operational expenses for business continuity.

Holden says that unforeseen major service delivery failures from municipalities and utilities can be covered under a BI policy, but planned interruptions and scheduled maintenance are excluded. It is thus vital that businesses have robust business continuity plans in place and have assessed various options for supplier continuity as well as buffer stocks for unforeseen business outages. Cover for product defects and recalls can be obtained through a products liability policy.

“It must be noted that Business Interruption insurance cannot be purchased as a stand-alone policy, but can be added to the property insurance policy or comprehensive package policy. Since business interruption is included as part of the primary policy, it only pays out if the cause of the loss is covered by the parameters agreed in the overarching policy.”

Holden advises that businesses should consider supplier extension cover as an add-on to a Business Interruption policy, which will insure the business against any financial loss for breakdowns in the supply or delivery chain.

“It is vital that insurers and brokers understand their clients’ businesses fully and assess the impact of such dependencies on suppliers and other third parties, to ensure the adequate level of cover is in place and has been rated accordingly.” Risk mitigation techniques are as important as risk transfer through insurance.