Business interruption insurance can cover any loss of income you may experience if you’re unable to operate due to a specified event, such as a fire or a flood. Read our guide to what business insurance is and what it covers.
In this post we’ll discuss how you can avoid underinsurance through accurately calculating your business interruption sum insured.
If you’ve any questions or concerns about your business insurance needs, we have a team of experts on hand to assist. They can also help you to understand the risks that you may face as a business. Contact us on 020 8290 9080 or email business@anthonyjones.com.
What is the Business Interruption Sum Insured?
In a business interruption policy, the sum insured is essentially the total amount an insurer may pay out to cover:
- The combined total of all the profits you would not make if you were forced to temporarily cease trading
- Operating costs from your recovery
- Any additional costs you may incur during your downtime or losses directly related to the disruption
An effective business interruption insurance policy should give you enough cover to restore your business to the position it was in before the insured event took place. This is why an accurate sum insured calculation is crucial for avoiding underinsurance.
Why Accurate Calculation Matters
When it comes to business interruption insurance, it’s vital that you avoid underinsurance. If you’re underinsured, it means that your policy will not cover all of your expenses should you ever make a claim, which would seriously hamper your abilities to recover from a setback.
How to Calculate Your Business Interruption Sum Insured
To calculate your business interruption sum insured, you will have to account for three factors:
- Gross profit
- Contingencies and extra costs
- Maximum indemnity period
Gross Profit
Business interruption insurance is supposed to replace your business’s income until you’re able to totally recover from the insured event. So let’s say you’re unable to trade for a year following a fire at your business premises, to calculate how much you’d lose over this period, you should consider:
- What would your gross profit be in an ordinary year – and what was the projected gross profile this year?
- Anticipated costs of purchases, staff wages, utility costs, and other expenses
- Potential future profit trends and inflation
Accountants tend to deduct these expenses when they talk about gross profit. But remember that your business interruption insurance is supposed to cover your entire business operation throughout the indemnity period.
Contingencies and Extra Costs
When calculating your business interruption sum insured, you should also consider any extra costs you may incur while your business recovers. These might include:
- Relocation costs
- Plant or machinery hire costs
- Supply chain issues
- Costs associated with hiring and training new staff you may need to bring onboard
Also consider any expenses you might save during the indemnity period. For example, if you move to temporary premises, or if some employees switch to working from home, you might make savings on utility bills and other operational costs.
Maximum Indemnity Period
The maximum indemnity period is the time it would take your business to fully recover from the insured event. Once you reach the maximum indemnity period limit, you will no longer receive any claim payments – even if you’ve not yet received your maximum sum insured.
A full recovery may take longer than you think. So even if you’ve correctly calculated your sum insured, if your maximum indemnity period is too short, you still won’t get all the cover you need.
Most businesses tend to get business interruption insurance with an indemnity period of 12 months. For total peace of mind, and to reduce the possibility of underinsurance, a minimum of 24 months would be better.
Avoid Underinsurance: Get Business Interruption Insurance Help
Be sure to read our full guide to avoiding underinsurance on your business interruption insurance policy. As well as additional tips for calculating your business interruption sum insured, our guide also details the sort of pitfalls to avoid when it comes to your policy wording.
At Anthony Jones, we can help you get a business interruption insurance policy that truly meets your needs, and avoids the risk of underinsurance.
We have a team of experts on hand who can advise on your insurance needs. They can also help you to understand the risks that you may face as a business. Contact us on 020 8290 9080 or email business@anthonyjones.com.
