Business insurance protects your company’s property (which may be damaged in a loss) and liability (the financial consequences of property damage or bodily injury caused to others in the course of business operations). An additional important coverage exists, that is sometimes overlooked or forgotten: business interruption insurance.
Business Interruption Insurance
A business’s continuity depends on its revenues and profits generated. A company without revenues cannot stay in business for long unless it has access to significant equity capital. This is especially true in the event of a major disaster: during the time it takes to refurbish the destroyed premises, all of the unavoidable fixed costs will continue to be incurred and must be paid. But what happens when you’ve exhausted your monterary resources?
Let’s look at a basic example: the building your company occupies has been completely damaged by fire. Everything has to be redone and it is estimated that it will take 6 months to rebuild. During this involuntary shutdown, lif, of course, goes on. Accounts payable such as mortgage, taxes, bank obligations, employee salaries and many other expenses continue to accumulate. Meanwhile, revenues are non-existent and your business is not making a profit. How long will your business be able to survive this situation?
Fortunately, there is insurance to cover these financial losses: gross profit loss insurance. This coverage will make up for the lack of revenue by compensating the company for the financial expenses it incurred during reconstruction. Loss of profit insurance will also pay for the loss of net profit. There are several types of coverage available, all of which are tailored to a company's needs.
The two most common are :
- Gross Profit Loss Insurance - Enhanced: This protection provides coverage for gross profit losses during the period of business interruption due to the loss, i.e. from the date of the loss until business resumes.
- Extended Gross Profit Loss Insurance - Enhanced: This protection provides the same coverage as the previous policy, but will continue to provide coverage until the business has recovered the profit it would have had in the absence of the loss, i.e. beyond the date of resumption of operations.
Usually, the benefit period is set at a maximum of 12 months following the loss; however, longer periods can be arranged. In addition, both plans cover the salaries of key personnel only. However, it is possible to cover regular salaries for up to 90 days. This could be critical when your industry employs scarce, hard-to-find skilled labor.
Amount of Insurance Required
It is important to establish the right amount to insure. To do this, simply forward the forms that your insurance broker will present to your accountants. They are authorized to complete them and this practice is strongly encouraged, as most forms include a proportional rule clause ranging from 50% to 100%, which is why it is important to properly evaluate the right amount of insurance. When establishing the amount of insurance, the accountant should take into account the growth or decrease of the business according to the observed trend.
Insurance for loss of gross profits is as important as insurance for real and personal property. To protect your hard-earned profits, talk to your broker and add this coverage to your business insurance policy.