Picture this. Your business is unexpectedly hit with a fire or flood. Your operations are suspended and your ability to generate revenue is severely hindered. Would you be able to:
• Make up for the profits/revenue lost while your business is shut down?
• Cover ongoing expenses, such as payroll and rents?
• Cover the extra cost of resuming your business as quickly as possible?
How business interruption insurance works
Business interruption insurance is essential to keeping your business running when operations are suspended due to a disaster. While property insurance covers the direct loss to property as a result of a fire, flood or other covered event, business interruption insurance covers the direct financial loss caused by your inability to utilise your damaged property. Business interruption insurance can also cover the financial loss incurred when the physical structure of your business is not damaged, but your business is still forced to cease operations. This type of interruption can be caused by an interruption of utility services or your third-party supplier’s inability to provide components you need in order to continue operations.
Why your business needs it
Business interruption can help your business rebound from a serious setback – and escape financial ruin. Purchasing this coverage is a smart idea for all types of businesses, including hotels, lodges, restaurants and manufacturing companies.
For example, should your hotel or lodge or part thereof be damaged by a fire today, you will immediately begin losing income.
• Your existing guests will have to be evacuated and, depending on your booking conditions or agreement with your agent, you may need to refund them for the remaining part of their stay.
• You will have to cancel any other bookings for the duration of the time your lodge will be out of operation.
• Any income derived from booking fees would be lost.
• Any income derived from activities not included in your standard rate would be lost.
• Your agent will not be able to sell your lodge as a destination to prospective guests and you may lose market share and exposure.
• You will need to continue paying your fixed costs, such as salaries, bank charges, interest, advertising, electricity, etc. even though you are not maintaining turnover.
• The period of the damage could extend into your peak season.
• You may have purchased additional stock for a specific event, such as a wedding or conference. The event would be cancelled and your additional stock lost.
• Before any rebuilding can begin, the site will first need to be cleared and all the debris removed. In most natural areas there are very strict laws applying to the removal and disposal of debris.
• You may have to submit plans for approval.
• Many builders are currently finding that they just can’t keep up with the contracts available. You may have difficulty in finding a reliable builder, which could delay the contract works.
• With all the building contracts in progress, there is a shortage of certain building materials, which may also delay the completion of the building.
• Once the lodge is completed, you may find that you have lost market share and may need to outlay for additional advertising, special packages, etc.
• You may find that it takes you 18 months before the lodge is back at the same level of turnover as it would have been had the damage not occurred.
By taking out business interruption cover, you will be insuring your income lost from the day of the fire/flood until you have once again reached the same level of turnover as you would have had. This period is called the indemnity period and is decided on by you at the time of taking the cover.
Business interruption cover can be issued on either a total annual revenue basis or a gross profits basis.
This basis covers the total annual revenue for the period of cover, (i.e. period of cover is normally either 6/12/18/24 months – the period needs to be specified by yourself and is normally representative of the time it would take you to re-build the hotel/lodge/camp if it was destroyed, and therefore was out of operation, and was thus not earning revenue – at which time the insurance cover would kick in to cover this lost revenue). With revenue basis, the sum insured is the annual revenue. This is the money paid or payable to the insured for goods sold and for services rendered in the course of the business at the premises.
Gross profit basis
The basis covers the gross profits being calculated as total revenue less any variable costs that will cease should the hotel/lodge/camp not be operational (so in effect the sum insured will be profit plus standing charges/fixed costs). With this option the sum insured will be less, as gross profit amount will always be less than revenue amount. However the tricky part is that it is a very difficult calculation to get spot on as a lot of costs are just unknown. If the calculation is wrong and the sum insured is incorrect – average is applied to the loss and the insured may end up being paid less than their actual loss suffered.
In view of the above we recommend in general that our hospitality clients go with the revenue basis of calculation when selecting business interruption insurance.
Kindly note that the above is just a very brief introduction and explanation of business interruption (loss of profits) insurance in basic terms for your perusal – prior to any of this cover being arranged we recommend having an in-depth discussion about the actual cover provided and conditions applicable to this section of insurance.