Saturday, 21 June 2014

Business Interruption Insurance

Business Interruption Insurance as the name suggests is a type of insurance which covers the losses of business caused by some disasters. A normal property insurance policy only covers the damage of the property; it should be clear in your mind that this is different from property insurance policy. Business interruption policy covers the business in addition to the property insurance for the profits that would have been earned had the disaster not happened. Almost all type of business can obtain this policy to have a confidence that they would be compensated in disastrous situation not only with the loss of property but also with the loss of profit earned.

Business Owner’s Policy
Business Interruption Policy is rarely sold separately. Generally it is sold as a comprehensive policy of Property Insurance Policy and Business Interruption Policy. As a comprehensive policy it is called business owner’s policy or BOP. If you are intending to purchase Business Owner’s Policy, it is very important to read in detail the causes in which insurance claim can be honored. Some insurance companies are issuing this policy on lesser rates but if you go in detail, you come to know that they are not covering many important causes of business interruption.

Coverage of Business Interruption Insurance
At this point of time we are clear about the nature of coverage provided by the business insurance policy. It is not the normal property loss but the loss of profit which could have been earned. In the following lines, we have explained the profits which are covered by the business interruption policy.
  1. Profits – Profit which could have been earned based upon last 3, 6 or 12 months financial statements. It is better to see in detail if insurance company requires audited financial statements or is there any other requirement in this regard. You should maintain those requirements in your ordinary course of business to avoid any problem at the end.
  2. Fixed Cost – fixed costs which a business has to incur even after the disaster has taken place. For example, business may have to pay some lease of the land to the government to a number of years based upon contract. Since business is not operating now, insurance company will have to take this burden.
  3. Temporary Location – Some business interruption policies cover the business to bear the expenses of moving to some location temporarily.
  4. Extra Expenses – Insurance Companies also reimburse the business some extra expenses facilitating them to recover and restart their business. You might be thinking why insurance companies cover it when it is not in the contract? Simple answer is that insurance companies want a business to be on its foot as early as possible otherwise they have to pay to the business for the profits to a longer period of time.

Disaster Events Covered in Business Interruption Insurance
It includes all the natural disaster situations but it is very important to check in the insurance policy what type of events is covered in it. Even if it is mentioned that they cover all natural disasters, ask them to provide a list of disasters they cover. Insurance companies have solid legal back of lawyers and they can play around in the policies. Generally these events are covered in Business Interruption Insurance;
  1. Avalanches
  2. Earthquake
  3. Volcanic Interruption
  4. Hydrological Disasters e.g. flood, Tsunami
  5. Meteorological Disasters
  6. Wildfires
  7. Health Disasters
  8. Space Disasters


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