09 Jul GETTING AHEAD OF BUSINESS INTERRUPTION RISKS
Despite news reports about natural disasters and man-made calamities that seemingly occur every week, we find that many businesses have not contemplated the potential impact of these exposures.
Consequently, they may end up with a risk management program that ignores potential losses or an insurance program that does not provide adequate coverage limits. The impact of these shortcomings is especially severe for small businesses, with studies suggesting that up to 60% fail following a significant loss. This figure becomes alarmingly higher if the business did not have a continuity plan.
Although, large companies with dedicated risk management departments are more likely to address business interruption exposures; still, many may not be adequately covered. The realities resulting from short- and long-term disruption of operations cannot be overstated. In addition to standard perils such as fire, lightning, or wind storm, businesses now need to be concerned with emerging trends such as cyber-attacks and acts of terrorism. They all can take down a business.
Business interruption insurance is designed to replace lost net income as well as cover ongoing normal operating expenses. Extra expense coverage compensates for costs beyond lost business operations, such as overtime pay, expedited shipping, relocation, and other expenses that minimize downtime. Since business interruption coverage is triggered following direct damage by a covered peril, it is critical to confirm that your policy contemplates all exposures, including cyber and terrorism.
Traditionally, business interruption insurance protected companies that were unable to operate due to covered perils, such as fire and weather events. The insurance came into use decades ago and has not been fully updated to align with the realities of conducting operations globally and via the Internet.
Today, operations can come to a screeching halt if servers are taken down by a cyber-attack or by any number of other ways that cyber criminals use to wreak havoc. Given the recent events in Kenya and elsewhere, we also have to consider terrorist attacks that would prevent employees from accessing their workplace.
When evaluating your insurance coverage, consider:
- Business type. The business interruption policy for a restaurant, for example, will likely look very different from the policy of an online retailer. One may focus more on the more traditional exposures (fires or storm damage), while the other would cover cyber attacks and data breaches.
- Policy limits. Make sure the policy covers the right expenses and length of time it would take your business to get up and running. Most disasters, natural or man-made, will halt your operations for more than just a few days. A good example is the DusitD2 complex terrorist attack that forced businesses in the complex and within the vicinity to cease operations because the entire area was blocked off.
- Financial impact. It’s important to understand total business expenses if an interruption occurs. Business interruption insurance is divided into business income coverage that would have been earned based on past financial performance, and extra expense coverage designed to take care of costs beyond normal operating expenses. Completing a business interruption worksheet will help you identify and quantify direct income exposures, including any contingent exposures existing in your supply chain logistics, as well as continuing expenses and potential extra expenses needed to mitigate a loss.
In addition to understanding what your business interruption policy covers, it’s also important that your employees are prepared in the event that your operations cease temporarily. A business continuity plan outlines how to continue operations following a disaster.
It’s more important than ever for an organization to review exposures and determine if the appropriate insurance coverages and controls are in place. Every enterprise needs to establish an effective business continuity plan that includes the following:
- Identifying threats or risks
- Conducting a business impact analysis
- Adopting controls for prevention and mitigation
- Testing, exercising and improving the plan on an ongoing basis
It stands to reason that business interruption is now one of the most rapidly evolving issues facing risk managers. Addressing risks before they happen and ensuring your enterprise is protected can be an demanding task. But it may be the difference between surviving or closing up shop if something goes wrong.
What is business interruption insurance?
Business interruption insurance is designed to help you recover lost business income and ongoing business expenses while your business is temporarily closed.
Business interruption insurance will help to pay for your loss of business income should you suffer a covered loss at your business location. If you suffer a loss and extensive repairs require you to close your business temporarily, you’ll lose out on crucial business income.
Do I need business interruption insurance?
The truth is, all businesses should consider having this type of coverage. Unexpected losses can interrupt or stall your business at any given moment, draining you and your wallet. Unexpected losses can come in many forms. For business owners in Nairobi, this recently came in the form of floodscausing millions worth of damage to their business premises.Damaged and destroyed property takes time to repair and replace. While these repairs are on the go, you still need to worry about ongoing and necessary expenses such as paying your employees, paying your bills to keep the lights on, and settling inventory payments, just to name a few. This is even more stressful when your business isn’t generating income.
If your business income has been interrupted or drastically reduced, ongoing business expenses can pile up like quicksand. Business interruption insurance can help you stay out of the quicksand.
How does business interruption insurance protect my business?
Business interruption insurance can help protect your business in many ways. If your business needs to close because of an insured loss, business interruption insurance will help you cover your ongoing business expenses. Examples of these expenses may include:
- Rent, electricity and other utilities
- Payroll for your employees
- Other expenses, such as property taxes
Essentially, this coverage replaces your lost net income while your business is closed so you can cover your ongoing business expenses.If the property damage to your current business location is too extensive, it might make sense to spend money and move to a new location to keep your business running. Business interruption insurance may be able to help with some of these expenses as well.
Can other interruptions impact my business?
Even if your business doesn’t suffer an interruption from a loss at your business premises, other unexpected events could impact your ability to generate income. If a fire or other loss impacts one of your key suppliers, that in turn may also interrupt your business and negatively impact your business income as well. Contingent business interruption insurance can help with these types of situations.
The following are examples of contingent business interruption situations that can impact your business:
- One of your suppliers faces a fire. Running a business requires a lot of moving parts. Your business may have a supplier that provides you with raw materials or merchandise. If your supplier experiences a sudden fire and is unable to provide you with the supplies that your business needs, your sales may suffer.
- Your key client loses their roof. Oftentimes, your biggest customer is your favorite customer. If the bulk of your business’ sales are to one client or customer, you’re in a vulnerable position. If this key client suddenly experiences a collapsed roof, they may need to focus their funds on roof repairs. If they’re unable to purchase your goods or services, this could drastically reduce your sales and your ability to keep your business running.
Don’t let setbacks interrupt your business’ success.
You can’t always control what happens to your business, or the businesses around you. You can, however, control how prepared you are. Having the right protection in place can make a huge difference. Make sure your business’ comeback is always stronger than its setback!