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Business Breakdown and Loss of Profit Insurance

By Bert Kleinhans, 19 August 2019

Business breakdown insurance is important in any company's planning. It serves to protect the company in the event of e.g. a fire or storm that damages or destroys the company and impairs the company's ability to generate income. This will enable the company to keep doing business and to meet financial commitments with regard to fixed costs. It can take a long time to be up and running again after such a loss.

It is therefore important for a company to have the necessary financial support to survive and recover after a loss. Customers do not always realise the essential role business breakdown insurance plays. Often this is also because clients are not eager to disclose their real income, turnover and gross profit to the insurer. Calculating a properly insured amount based on the company's gross profit is important to obtain adequate coverage. Furthermore, on the part of the insurance personnel, it requires a great deal of expertise as well as knowledge of the client's business activities to correctly calculate the insurance amount at the start of the insurance, as well as at the time of loss (when claimed).

Business disruption (also Loss of Profit Insurance) is not a standalone product, but is part of a policy package under which the client's property is insured.

In order to file a claim under the business interruption section, the insured property must have been damaged or destroyed by an insured danger (such as fire or storm). The physical damage is covered under the material property section, but the company's loss often does not stop here. The company's earning capacity can be so impaired by the damage / loss of the property that it reduces or even stops its income.

When reducing or ending a business, there are three main things to note:

Business breakdown insurance provides the necessary cover against these losses. It starts immediately after the event and can continue for a foreseeable period thereafter.

The success or failure of a business is usually measured in financial terms. A claim under the business failure insurance is also calculated in financial terms and therefore the company's turnover and reduction in turnover play an important role. Another aspect to keep in mind when calculating turnover is variable costs, i.e. costs that decrease directly with a reduced turnover such as wages.

Business interruption begins immediately after a loss and continues for a period until business activities have normalised again. This period is known in the policy as the period of indemnity. The choice of this period must be sufficient to enable the customer, after a loss or damage, to repair and/or rebuild the premises, replace equipment and machinery, replenish supplies and rebuild goodwill. It is important that the choice of period at the start of insurance lies with the client, as a period that is too short is a form of underinsurance.

This period can be any length and is not limited to a 12-month term, which typically covers a short-term insurance policy. Especially seasonal businesses should insure for longer periods, e.g. 24 months or more, otherwise the indemnity period may end in the middle of seasonal operations. The factors that influence the client's choice are: the nature of his business, ability to acquire other premises, how quickly content can be repaired or replaced, etc. It is important to remember that if the client prefers to choose an indemnity period of less than 12 months, e.g. 3, 6 or 9 months, the sum insured for the selected period remains the company's full annual gross profit.

Business breakdown insurance should be included in the compilation of a company's insurance portfolio at all times.

Please contact one of our expert advisors for further information.

The above-mentioned is for information purposes only and is in no way advice. Boshoff Visser Konsult (Pty) Ltd. encourages readers to get in touch with an expert financial advisor before making any decisions.