Business Interruption
Essential protection or just another expense? Let’s find out!
There are numerous aspects to safeguarding your business investment beyond just obtaining insurance for the tangible assets of a company. The purpose of Business Interruption (BI) is to protect against a loss of revenue caused by an insurance event. For property owners, your revenue is ‘gross rental income’.
While the terms of a lease will include many protections for the property owner, there are circumstances where your tenant can stop paying rent because of damage caused to your property by a peril.
You may not think twice about insuring your asset against fire and other perils. Purchasing property insurance on the building provides protection against the asset only. Business interruption provides protection against loss of gross rental income while your property is unable to be tenanted following an insured event.
- Property insurance covers rebuilding the asset.
- Business interruption covers the loss of gross income, while the asset is being rebuilt.
Where finance is involved, protecting the rental income generated from your asset, is essential.
Business Interruption cover is not automatic, it is an optional section. Therefore do not assume if the asset is insured, that business interruption is automatically covered.
Business interruption only covers specific events and the cover is typically triggered where an insurable loss is covered under the property section of your policy. Typically, a fire, storm or water damage loss which renders a property untenantable will trigger a business interruption claim.
If the property policy does not respond to the claim, business interruption cover will not normally be triggered. If you do not have flood included in your property cover, the business interruption policy will not cover loss of rent following a flood event.
A business interruption policy can extend to include cover for additional events where there is no damage to the property, for example prevention of access caused by an insured event or certain events which cause the property to be closed by authorities. Typically these types of covers are only triggered where your tenant has means under the lease to stop paying their usual rental payments to you.
Business interruption does not cover ‘tenant default’ (where the tenant withholds rent due to a commercial dispute). Cover for tenant default may be available in the insurance market however such coverage can be difficult to obtain.
Insurers do not cover business interruption caused by communicable disease, including pandemics or endemics.
Breaking it down – How does Business Interruption insurance actually work?
The coverage begins on the date of the damage and/or loss and continues until the rental income is restored to the level they would have been if the loss had not occurred, or to the end of the Period of Indemnity (POI). The POI duration is selected by the policyholder when the coverage is purchased. The period is stated in months on the policy schedule and can usually range from 6 months to 36 months, depending on the insurer.
Due to the high demand on the construction industry, shortage of labour and supply chain issues, property owners need to consider increasing their POI to ensure adequate coverage. Determining the length may depend on location, building size, materials and size of the event (singular or large catastrophe) among other factors.
Furthermore, delays in the project timeline may also be caused by factors such as obtaining development approval from the council or undergoing investigations by the fire department, WorkCover, and other relevant authorities.
During an insurance event, there are usually additional costs incurred beyond the loss of revenue to consider, such as the cost to prepare your claim (accountant professional fees)
You can also insure Additional Increase Cost of Working to cover additional costs incurred.
These costs can be significant, especially for larger losses.
Don’t get caught out – Why underinsurance is trouble waiting to happen!
Property managers are crucial in providing accurate information especially if a policyholder is unsure. Consult your property manager for precise rental information. Ensure your declared rental income matches the terms of your lease.
Underinsurance in a business interruption policy can occur when a policyholder insures for less than the actual gross rental income.
Key Consideration Factors:
- Was CPI applied to the lease, and if yes, is it a fixed or market rate?
- Has the occupancy rate increased since your last review?
- Have any tenancies changed, with the new tenants paying a higher rate?
- Has there been any building extensions, if so, has your rental income increased?
- Is your lease inclusive of exclusive of outgoings?
- Are you registered for GST?
As an insurance broker we work closely with various other companies that provide value to our policyholders. Another company that we utilise the services of is LMI Group who focus primarily on Business Interruption. See below an example from LMI of how underinsurance can be calculated.
Example: The sum insured noted on schedule is $500,000, however the actual gross rental is $800,000 at the time of the loss. In the event of a $200,000 claim, the payout would be adjusted down to $125,000, leaving the property owner with a self-insured loss of $75,000.
Business Interruption insurance is more affordable than you might think!
The cost of Business Interruption insurance is typically determined by a number of factors, including the insured value, period of insurance, and prior loss experience. Insured value refers to the maximum amount of coverage that the policy will provide in the event of a business interruption. The higher the insured value, the higher the premium will typically be.
The period of insurance is the length of time for which the coverage will be in effect. This can range from a few months to several years, depending on the needs of the business. The longer the period of insurance, the higher the premium will typically be.
Prior loss experience is another important factor that can impact the cost of Business Interruption insurance. If a business has a history of losses due to business interruption, the premium may be higher to reflect the increased risk. Conversely, if a business has a good track record of avoiding business interruptions, the premium may be lower.
Other risk factors, such as the details of the construction of the business premises and the details of any tenants, may also impact the premium. For example, if a business is located in an area prone to natural disasters, such as weather perils i.e. cyclones or bushfires, the premium may be higher to reflect the increased risk.
In the instance where you choose not to cover damage and/or loss caused by a flood event, your insurance premium will not be impacted even if your business is located in a flood-prone area.
Calculate with Confidence – Business Interruption Calculator
An online Business Interruption calculator is a helpful resource for calculating your Gross Rental Income. The LMI BI Calculator is specifically designed to accommodate the unique wordings of each insurer’s business pack, making it a dependable and accurate tool. As the wording of each business pack may vary from one another, it is important to use a calculator that is designed to cater to the specific language used in your policy. These calculators will eliminate guesswork and provides a more precise calculation of your Gross Rental Income, providing peace of mind and saving you time and money in the long run. If you require more information, please contact our office, as we are always happy to assist with your enquiries.
