BUSINESS INTERRUPTION CONUNDRUM
by Roger McLeod

Here’s a startling fact: More businesses go out of business due to insufficient business interruption insurance than due to fires or any other cause. Sadly, since this aspect of insurance is the most complicated, it is often neglected. 

The first insurance seminar I ever attended, back in the early 70's, was quite revealing. The participants were mostly insurance agency owners - guys who'd been around for many years - so I was feeling a bit intimidated. The seminar was a workshop on business interruption insurance - the proper setting up of coverage to provide businesses with continued income when they were shut down for various reasons. It was astounding to see that among the 75 people in that room, with thousands of years of combined experience, no one was able to provide the moderator with acceptable solutions to the fictional cases he presented. 

Not only is business interruption insurance complicated by ambiguous policy language, it involves predicting the future, which is never easy. You start by choosing the type of coverage, from among too many choices, based on how long you expect your operations to be shut down from something as serious as a fire, heavy water damage, or the million other things that can, and do, go wrong.

Next, you try to make a reasonable guess as to how much you'd be losing in revenue if you were shut down for that length of time. Each type of coverage has a long list of rules as to how you are to make such a calculation. Considerations include issues such as payroll - whether or not all or just some of the employees are to continue to be paid, or suppliers - how your business could be affected by the inability of your suppliers to put you back in your former position, as their businesses are shut down for some reason.

Thankfully, some relief appeared in the form of "package policies" that came with a little, magazine-like explanation of what you are covered against in real English. 

Neighbourhood pubs owners might find a type of policy called "Profits Form" to be helpful. This coverage is the "Rolls Royce" of business interruption, especially when the insurance company lets you skirt around some of the traps by altering the terms to be even less complicated.

With the goal of protecting a pub against bankruptcy by providing adequate replacement revenue, the calculation simplifies down to merely working out what it would cost to pay all the ongoing expenses, even when the pub was closed down, added to the net profit the operation should have been making, for up to a full year of shutdown. Even better, if the pub can reopen, but it takes a few months to get income back to where it used to be, a claim can be made for the difference!

Not all forms include the conditions mentioned, so you need to be careful about setting up your protection. Don't leave yourself exposed to loss by neglecting business interruption insurance.

Roger McLeod works for Prosperous Financial & Insurance and can be reached at 604-597-1734.