Business Interruption Insurance Explained


Business Interruption Insurance

After the occurrence of a disaster, such as a fire or water damage, it generally affects the company’s business: A decline or absence of turnover will be noted. As a result, the entrepreneur may face difficulties in meeting these expenses: Supplier regulation, repayment of credits, salaries and social charges.

The business interruption insurance allows the entrepreneur to hedge against this risk, through the payment of compensation to the company, in order to put it back into the financial situation prior to the occurrence of the loss.

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  1. what does business interruption insurance cover

The implementation of the business interruption insurance is subject to the existence, on the day of the accident, of an insurance covering for a sufficient amount the direct material damage caused by the events guaranteed.

Claims that could result in compensation to the company through the business interruption insurance contract are as follows:

  • Water damage, such as flooding;
  • A storm, hail or damage caused by the weight of snow on the roof;
  • Natural disasters;
  • Fire or explosion;
  • Electrical damage and the fall of lightning;
  • The occurrence of a machine breakage;
  • Acts of vandalism, terrorism, and sabotage;
  • Damage caused by riots;
  • Damage caused by aircraft and space.
  1. Insurance covering the operating loss

Several business interruption insurance options are available and the company manager has the choice between:

  • Purchase a basic business interruption insurance policy that will compensate for the loss related to the decline or lack of turnover and the reimbursement of any expenses incurred as a result of the loss;
  • Purchase supplementary guarantees to the basic business interruption insurance in order to be compensated for expenses necessary to maintain the activity and any interest for late payment that the company incurs as a result of the loss.

Depending on the size of its business, its business line, and its risk analysis, the company manager will be responsible for determining the level of guarantee to be set in his contract for the loss of business.

  1. Compensation for operating loss

The indemnity period is set out in the business interruption insurance contract. The entrepreneur will be responsible for fixing this period, 
noting, in particular, the time it will take to restart his business if a loss occurs.

The indemnity period set out in the business interruption insurance contract is generally between 1 and 3 years.

The entrepreneur will have to ask himself the right questions to determine the period of compensation that he wishes to benefit from his contract of insurance loss of operation. In the event of a disaster, the following questions may be useful in this process:

  • Is there a risk of equipment being replaced? If so, how long does it take to replace?
  • Will the company have to completely stop its activity or will it be possible to continue in part?
  • Is the industry seasonal?
  • Can we change our mode of production, for example by subcontracting certain tasks, during the re-establishment period?
  • What is our time to produce a product? (If the products are also destroyed, the time needed to replace the damaged material plus the time needed to produce the products must be counted).
  1. Amounts secured by business interruption insurance

Compensation for the decline or lack of turnover will be refunded, through a business interruption insurance, to an amount corresponding to the company’s gross operating margin.

The calculation of the gross operating margin consists of subtracting from the turnover the variable expenses and the fixed expenses of the company.

Of course, it is unclear how this gross operating margin will be determined for future years, and it is possible to include an adjustment in the business interruption insurance contract (in return for Additional contributions).