Blog Questions: Business Interruption on a New Business

bigstock-Questions-And-Answers-8042036Over the past 2 days I have had two similar questions.

Morning Allan,

Could I quickly take up a minute of your time to ask what your thoughts are on including BI cover as part of a client’s insurance program for a start- up business ?

The risk happens to be a bar.

My immediate thought would be lack of trading pattern to substantiate a loss in the first few months, but there would be fixed costs incurred to operate the business from day one.

Regards Rob

[Surname and email provided]

The second one read:

Hi Allan, Hope your well.  Just a quick email on perhaps a possible topic for one of your future blogs, if I may.  Do you think you can cover off on how a broker/client should consider calculating loss of gross profit for:

  1.  A completely new business with no historical trading figures
  2. Or a business purchased in a “fire sale”, pardon the pun, where the historical figures may not reflect the future trading of the new management team

 Assume it’s all about sending the correct trend percentages and conversation with the client, but if you can download some of your experiences with these scenarios would defiantly read it with interest and better arm me on what to look for.

Many thanks in advance.

Regards,

Anthony [surname and email provided] ========================================

The answer to both questions is the same. It is possible and indeed I would encourage the Insured’s to be offered full business interruption coverage.

The reason for this is that to start or purchase a business, even at a fire sale, does require and investment and quite often finance is involved. Having business interruption insurance in place provides protection in the form of maintaining a revenue stream to fund the repayments, lease payments etc, wages etc for the owners and staff.

It also provides cover for fresh advertising and other increases in cost of working to mitigate a loss. Turning now on how best to do it, most business owners would work up a budget before they start. Most finance institutions would want this before they loan any money and it is good business practice that I am sure you use in your own business.
budgetYou or the Insured would then use this budget to calculate the insurable gross profit in line with the policy wording that you propose using to protect the client. BIcalculator which you both have access to has an option for using budgeted figures for a wide range of insurance policies: business packs, stand alone Business Interruption wordings and ISRs.

I would then ask you to contact your client every 3 or 4 months and see if they are achieving budget and or if there any significant variations to budget revenue or expenses that require an adjustment to the declared value /sum insured. Besides ensuring the client remains adequately insured, the contact allows you to build a relationship with the client and see if their business is changing in other areas that require any other risk management or insurance advice.

The vast majority of business interruption policies have a “New Business” clause which allows for any trading that the business has achieved between the start date of the business and date of the damage giving rise to a disruption to be used as a starting point to calculate the Standard Turnover to which adjusts are made using the “Adjustments Clause” to calculate the expected turnover and rate of gross profit the business would have a achieved but for the loss. I would not suggest using dual wages to insure pay-roll in the first year as this would add another level of complexity. I would recommend insuring wages 100%. I hope this all assists in your understanding.

Regards

Allan

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