Business Interruption: A Deeper Dive

Are you confident that your business has the right insurance coverage? It may shock you that a significant number of UK businesses do not! Recent statistics show that 44% of small-to-medium enterprises (SMEs) in the UK don’t have any form of insurance at all, and up to 40% could be underinsured (with 60% of businesses buying their insurance coverage online, you can see how underinsurance can happen!).

Fortunately, it’s never too late to reassess your insurance position and get your business adequately covered, and one thing you may have not considered is business interruption insurance.

Your other insurance provisions may vitally insure against damage and loss to premises, stock and fleet, but business interruption insurance covers you for any loss in revenue that you suffer in business downtime, be it a few days, or longer periods of inactivity.

Ascend is here to guide you through everything you need to know about business interruption insurance.

What can Business Interruption Insurance safeguard your business against?

Business interruption insurance can safeguard against the following:

• Loss of revenue

Quite simply, if your business is out of action due to damage, disaster, cyber attack or loss of key personnel, it Is going to lose money. Business interruption will cover you for your daily losses for a pre-determined period of indemnity.

• Loss of gross profit

Hand in hand with loss of revenue is the loss of gross profit. Business interruption insurance will cover this, too, both the net profit that would have been earned and the ongoing operating expenses that continue during the interruption period, like salaries, rent, and utilities.

• Increased costs

A business that suffers a disaster could subsequently suffer increased costs due to factors like temporary relocation, the hiring of temporary staff, overtime having to be introduced, the outsourcing of services, implementing stronger security measures, disruption of supply chains meaning materials or components having to be sourced from alternative suppliers, and health and safety upgrades. Business interruption insurance can cover all of the above, helping your business recover and return to normal operations more quickly.

What if my business needs additional cover?

Some business might consider an add-on policy called AICOW.

AICOW stands for Additional Increased Cost Of Working. It allows for additional expenditures during a period of interruption, helping a business get back on its feet as soon as possible.

AICOW is often confused with ICOW (Increased Cost of Working). ICOW covers increased costs of working that are not more than the loss of revenue that would occur if these costs were not paid. Essentially, it covers economic losses, meaning the expenses incurred must be less than or equal to the revenue saved. ICOW is usually included in Business Interruption policies.

AICOW covers additional costs that exceed the resulting loss of revenue. This means it covers uneconomic losses, where the expenses incurred are greater than the revenue saved.

Two case studies

1. After a fire damages a bakery, the bakery rents a temporary kitchen to continue making bread. The rent for the temporary kitchen is covered by ICOW. If the same bakery needs to hire extra staff and expedite shipping to meet urgent orders because of the fire, the costs for these additional measures, beyond what ICOW covers, would be covered by AICOW.

2. A medium-sized manufacturing company, ABC Manufacturing, produces custom furniture. A severe storm damages their primary production facility, rendering it unusable for six months. The company has standard business interruption insurance, which includes both ICOW and AICOW provisions.

Under their ICOW coverage, they get temporary facility rental so, to continue operations, ABC Manufacturing rents a temporary production facility nearby, orders essential machinery to replace the damaged ones, and arrangements are made for transportation to the new facility for employees. All these measures fall under ICOW and are aimed at maintaining business continuity.

As the recovery period continues, however, ABC Manufacturing faces additional challenges. They now need to access funds from their AICOW coverage. These will be used to cover:

• Specialist consultation - the company hires specialist consultants to expedite the setup of the temporary facility and optimise the production process in the new environment.
• Expedited shipping costs - to ensure timely delivery to customers, the company uses express shipping services, which are significantly more expensive than their usual logistics arrangements.
• A marketing campaign - launched to reassure customers about the company's operational status and maintain customer loyalty during the disruption.

These additional expenses above go beyond the usual increased costs of working and are covered by the AICOW provision in ABC Manufacturing's insurance policy. This coverage allows the company to maintain its market position, meet customer expectations and ensure long-term business sustainability.

Business interruption policies vary significantly as their coverage levels can depend on several factors, and it’s often the case that businesses find sourcing the right business interruption policy a challenge, especially as it isn’t one they can easily buy online. But ultimately, many businesses are at risk of unexpected interruptions to operations and, having the appropriate business interruption policy, tailored specifically to its needs, is hugely beneficial.

Is your business adequately insured? The time might be right to review your risk management and business contingency plans and talk to an experienced broker about business interruption insurance.

At Ascend, we will guide you through the various business interruption insurance policies available and handle claims on your behalf, providing support when you need it most. With years of experience across all types of industries, our team will help you obtain practical coverage that reflects your business needs, allows for an appropriate indemnity period, and comprehensively covers the specific risks of your business.

Get in touch today with Matthew Collins on 01245 449060 or email Matthew.Collins@ascendbroking.co.uk.