What is business interruption insurance & who needs it?

Being a business owner has its advantages and disadvantages. Operating your business solo means you don't have to share any of its profits with anyone and you’re responsible for all its successes. But, it also means that if your business isn't earning anything or goes through a rough patch, so are you! 

Insurance can cover you financially should you get robbed or need to replace any equipment. But what about your business itself? The costs of not operating can be expensive and leave you scrambling to catch up. To cover your business in these circumstances, you should consider business interruption insurance. But what exactly is business interruption insurance and does your business need it?

What is business interruption cover?

There are many different types of insurance for businesses, and business interruption insurance is one that many people aren’t aware of. It covers your business for any earnings lost while it recovers from the impact of theft or damage. This allows you to keep paying your usual monthly expenses such as rent, salaries and other operating costs, while you’re not generating income. The goal is to keep the losses your business is experiencing from permanently impacting its financial state. With business interruption insurance, your business can return to the financial position it was in before it experienced the theft or damage incident much more easily.

You might think that your business can weather such a setback, but statistics say otherwise. SMME failure rates in South Africa are among the highest in the world, with five out of every seven businesses failing within their first year of operation. The most common reasons for this are financial issues.

 Because business interruption cover kicks in once you have activated another type of business insurance, it’s seen as a complementary product that enhances the benefits of the business' primary coverage. Without one, the other wouldn't need to exist.

Why do you need business interruption cover?

Business interruption insurance is critical as it covers the unpredictable loss of earnings a business can experience after an incident. The theft of crucial or custom-made manufacturing equipment might put a business out of commission for over a week. On the other hand, a broken window might only result in a few hours of lost work. 

Here’s an example that illustrates how business interruption insurance can help your business.

Thando has successfully run his own restaurant since 2019. One evening, a fire rips through the building next door and destroys part of Thando's restaurant. The rest of the premises are also damaged from the smoke. Thankfully, Thando has used a business insurance calculator to determine the right amount of business insurance for his needs. It means that the cost of gutting the restaurant and replacing its furniture and fixtures is fully covered — and can be completed in under a week. However, in that week, Thando will still need to make his usual business loan repayments, pay the restaurant's rent and provide his staff their usual weekly salaries.

Thando will have his hands full supervising the restaurant rebuild and tracking down replicas of the furniture and fixtures needing replacement. Thankfully, he knows that his business interruption insurance will keep him from having to dip into his personal savings to meet his financial commitments over this period.

What is covered by business interruption insurance?

Business interruption insurance typically covers a business's fixed expenses, loss of operation profits and extra working expenses needed to keep the business operational (such as temporary premises or staff overtime). It can also cover the cost of losing connections to essential services (such as water and sewage or internet and telephone access). It can cover your business if it cannot access its property due to damage and can also cover any material damage sustained by suppliers or contractors that keeps them from operating the business.

In South Africa, business insurance can be adjusted to the business's unique needs, with a higher premium equalling more coverage.

How is business interruption cover calculated?

To get adequate business interruption cover, you'll need to use a business insurance calculator to determine the coverage you need. 

First, you'll need to select an adequate indemnity period. This is how long it will take to restore your business's function to what it was like before the theft or incident. You'll also need to clearly and accurately calculate the costs you want covered and what exactly your policy covers. You'll also need to accurately calculate what your gross profit for a certain period is. This sum should include VAT. 

This figure should also cater for any trends that could increase and decrease the figure once the insurance period comes to a close. As your business grows or changes you should also update this amount. 

It's also important to note what business interruption insurance doesn't cover. It won't cover any business interruption claim where the financial or operational loss isn’t directly attributable to the insured building or equipment. For example, if a flood warning is issued in an area and Thando’s restaurant must be evacuated for a certain time period but the flood misses the restaurant, it might not be covered for this loss in earnings. It also won't cover any item that should have been insured under another form of insurance. For example, damage to a work computer wouldn’t be covered under business interruption insurance, instead it would be covered under your business contents insurance.

Where to find the best business insurance in South Africa?

If you’re ready for a business insurance quote or want access to a business insurance calculator, Budget insurance can walk you through the process and answer any questions you might have. To start the conversation about your business interruption cover, contact us and request a quote or have someone call you back.