While a business may be out of operation after a disaster such as extensive fire damage, there are still fixed costs that require payment. Staff costs, leases and general running costs, do not halt while a business is closed for refurbishment. A business interruption policy ensures that the business can continue to meet its fixed costs, until such time as the business is, once again, bringing in an income.
"Business interruption insurance is an often overlooked insurance, purely because the process of calculating the financial loss due to a catastrophic fire is often not well understood" says Jonjon Smit, National Sales Manager for CIB Insurance Solutions. "Considering that the policy holder can select the period of indemnity, anywhere from 3 to 24 months, dependant on the type of business insured and taking into account the availability of stock, machinery and the time frame required to rebuild the premises, the policy is relatively inexpensive. The policy also offers various extensions of cover, for example failure of the electricity supply and prevention of access to the premises, amongst others".
The business interruption policy can be calculated on various basis' depending on the nature of the business, for example, difference basis, revenue basis and cover for standing charges. "In most cases the profit claim will exceed the material damage claim" says Smit. "To me this is probably the most neglected class of insurance, yet if we follow the simple rules, an insurer can underwrite the policy prudently and a broker can be satisfied that they have offered the client a comprehensive insurance policy although the calculation of the sums insured we would recommend be done in conjunction with the client's auditors".
Business interruption insurance offers policy holders peace of mind, that should a disaster happen, the proprietor would be able to meet his or her financial responsibilities until such time as the business is once again operational, and generating an income. The advantages of having business interruption insurance, therefore, far outweigh the minimal extra fee incurred to have adequate business insurance cover.
FORMULA FOR GROSS PROFIT INSURANCE
Gross Profit The amount by which the sum of the turnover and the closing stock shall exceed the sum of the opening stock and the uninsured working expenses specified below.
The amounts of the opening and closing stocks shall be arrived at in accordance with your usual accounting methods, due provision being made for depreciation.
Uninsured Working Expenses
Being: Purchases (Less discounts received)
Bad Debts
Delivery & Packaging
Discounts Allowed etc
The Gross Profit can be calculated by deducting the amount of all uninsured Working Expenses (Variable costs: Specified Working Expenses) from the turnover.
Term definitions:
Turnover:
The money paid to or payable to the Insured for goods sold and delivered and for services rendered in the course of the business at the insured.
Gross Profit:
The amount by which the amount of the sum of the turnover and the amount of the closing stocks shall exceed the sums of the amount of the opening stock and the amount of the uninsured Working Expenses (variable costs)
Standing Charges:
Charges/expenses which continue to be payable in full, irrespective of the volume of turnover, or which does not reduce in direct ratio to a reduction in the volume of turnover.
Uninsured Working Expenses:
The direct opposite of a standing charge i.e. a cost or expense which varies in direct ratio to a variation in the volume of turnover.
Increased Cost of Working (No Gross Profit Cover):
The insurance is limited to the reasonable increase in expenditure incurred by the insured during the indemnity period in consequence of damage for the purpose of maintaining the normal operation of the business.
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