Is your business covered for loss of income?

It’s all well and good being paid out for your assets, but what about the foregone earnings in the meantime?

Small business owners who have a short-term commercial insurance policy are often not aware that they may not
be covered for the loss of income, under a standard commercial policy.

Although a standard short-term insurance policy can assist SMEs to replace, repair or reinstate various assets following a loss, it does not provide cover against the loss of income as a result of a business being non-operational or not being able to provide a service following a covered loss.

Business Interruption cover is offered by insurers as optional cover to protect a business against the loss of income following an insured event. For this cover to come into effect following a loss, there needs to be a financial loss to the business as a result of the unforeseen incident caused by a peril that is insured in terms of the underlying commercial short-term insurance policy.

For instance, should a fire occur at business premises, the short-term insurance policy would cover costs related to repairing the building and replacing equipment or any other insured assets destroyed during the fire. Thereafter, Business Interruption cover would come into effect to cover the business against loss of income for the period it can’t operate.

Business Interruption cover can be extended to also protect businesses against losses due to incidents or disasters that occur at the premises of a third party, such as a supplier or customer. However, not all risks that occur outside the premises will be covered, if not specified.

A common question that SMEs usually ask about Business Interruption insurance cover is the amount of cover that is needed for their businesses. There isn’t a straightforward response to this question, as every business is unique and may not be impacted the same.

The ideal approach is working together with your broker to undertake a risk assessment exercise to identify potential risks that may impact the business, as well as the amount of time needed to recover. This will determine the amount of Business Interruption cover that a business should take out.

The impact of shutting down business premises and not being able to run operations will not only lead to financial losses and cash flow disruptions but could also threaten the survival of the business if it cannot fulfil its contractual obligations to customers and suppliers.

What Business Interruption insurance covers

Most business interruption insurance covers the following items:

• Profits: Based on prior months’ performance, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
• Fixed costs: These can include operating expenses and other incurred costs of doing business.
• Temporary relocation: Some policies cover the costs involved with moving to and operating from a temporary business location.
• Commission and training costs: In the wake of a business interruption event, a company will often need to replace machinery and retrain personnel on how to use the new machinery. Business interruption insurance may cover these costs.
• Extra expenses: Business interruption insurance will provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the business gets back on solid footing.
• Civil authority ingress / egress: A business interruption event may result in government-mandated closure of business premises that directly cause financial loss. Examples include forced closures because of government-issued curfews or street closures related to a covered event.
• Employee wages: Coverage of wages is essential if a business does not want to lose employees while shut down. This coverage can help a business owner make payroll when they cannot operate.
• Taxes: Businesses are still required to pay taxes, even when disaster hits. Tax coverage will ensure that a business can pay its taxes on time and avoid penalties.
• Loan payments: Business Interruption coverage can help a business make their loan payments even when they are not generating income.

Source: Investopedia (www.investopedia.com)

• Written by MALESELA MAUPA

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)