Business interruption policies compensate for unexpected downtime
By AdvocateDaily.com Staff
Pearn, an associate with Foster & Company, says business owners typically grasp the value of property insurance very easily, to cover fire, flood or other types of damage to a building.
However, he says they may need the guidance of an insurance broker to understand the more subtle value of a business interruption policy, which applies to the financial hit companies take during the upheaval of an unexpected incident.
“It’s very helpful coverage for situations when you have a risk of downtime that can seriously affect your bottom line,” Pearn says. “While your building may be put back into working order and the physical damage corrected, the costs to your business are still there.
“Businesses often won’t realize what they’re missing out on until it comes to a claim, and they can see the disruption that has been caused to their operation,” he adds.
Pearn explains that claims are most often associated with unforeseen events such as fire, flood or electricity blackouts from companies in manufacturing industries, or with a significant refrigeration component to their business.
“But I’ve also seen cases involving pharmacies, water parks and any other form of business that depends on smooth and regular operations to make their company work,” Pearn says. “You may also have a claim if a business partner suffers an interruption in supply or service outside of your control.”
And claims don’t necessarily have to relate to physical damages to property, he adds.
“If you’re a professional firm using a virtual network where documents are accessed remotely in the delivery of services, then issues with that electronic workspace can have a significant impact on the ability to deliver a project on time,” Pearn says.
In addition to covering lost income and profits caused by the interruption, policies typically also apply to ongoing operating expenses that persist during the business pause, as well as costs associated with temporary fixes, such as moving to a new location while repairs are underway.
When claims are made, Pearn says the subjective nature of accounting can lead to intense negotiations with insurers over the value of lost income suffered as a result of a business interruption.
“If you’re trying to maintain a book of business, and you see a dip in revenue coinciding with the interruption, it can be tricky to calculate the precise value, but engaging an accountant and other professionals with an understanding of the business is one helpful way of determining the loss,” he says.
“When we’re engaged as counsel, we try to liaise with the professionals hired by claimants and insurers, to help them focus on the key issues that will move us towards resolving the claim.”