In recent months, we have seen two major fires ravaging buildings in Glasgow city centre – the Glasgow School of Art and Victoria’s night club – and ongoing impacts on Salisbury-based businesses following the nerve agent attack. Last year, we saw terrorism creating other issues for businesses suddenly finding their premises behind a police cordon.
A fund of £5m is available to Glasgow businesses demonstrating hardship following the fires. This conveys an appreciation of how tough trading and cashflow management can be for businesses directly or indirectly caught up in incidents like fire, flooding and storms.
Many businesses assume buildings and contents policies cover losses incurred in disaster-type scenarios, but this is not so. Businesses seeking compensation for a loss of income need appropriate Business Interruption insurance.
Businesses should seek expert guidance regarding the right level of cover required, as the terminology used in business interruption insurance policies can be difficult to interpret correctly. For instance, cover for “denial of access by a competent authority due to damage in the vicinity of the premises” means that, even if your premises are not directly damaged, you could be covered. The word ‘vicinity’ in this scenario may offer wider cover than, for instance, a wording of ‘one mile’. It is important to understand the words and definitions within the policy, as this could mean the difference between being covered and or having insufficient cover.
A key issue when buying business interruption cover is deciding the type of cover required. Some policies cover damage to premises and equipment due to fire, storm and flood, as well as offering compensation for the incident-related breakdown of essential equipment. Others also provide cover if a business cannot physically trade due to denial of access to the business premises. Some can also cover losses incurred when an incident occurs at the premises of a key client or supplier. It is important to speak to an expert to assess the appropriate cover required for your business.
It is also crucial to determine how long it would take your business to get fully back on its feet following a major incident. This determines the “indemnity period”, which could be 12, 24 or 36 months long. The next variable is the sum to be insured by the business, which can be calculated in several ways, often based on a business’s turnover plus and minus some other elements of a business’s income, worth and assets. Factors such as inflation, and also future business prospects that may be affected by a temporary closure, need to be included when determining the business’s appropriate sum insured.
There are other costs to consider too, such as the rental of temporary premises and possible additional marketing expenses. Bank loans to cover repairs may also be required.
According to the Chartered Institute of Loss Adjusters (CILA), 43% of business interruption policies have inadequate sums insured. And, sometimes, those with business interruption insurance forget to update their sum insured to reflect new situations.
Given the difficulties in assessing the right level of cover and interpreting policy wording, it is advisable to work with a broker who can suggest the right sum insured and offer a policy covering the business’s core needs. The average downtime for a small business following a severe incident is typically over three months, but every business is different, so your broker’s advice is invaluable.
With climate change and arson both causing a significant number of incidents, it is important to ask the ‘what if?’ question in relation to your own business. Could you simply pick up laptops and work elsewhere, or would you need to replace equipment and find premises to accommodate it?
Either way, you should arm yourself with a robust continuity plan, detailing how to respond to a crisis.
Talking to your broker can make business interruption insurance easier to understand and navigate. If you need assistance with this, please get in touch.