Kobus van Niekerk and George Jennings

Scope of Business Interruption Insurance

Business Interruption insurance is also known as Loss of Profits insurance and/or Consequential Loss insurance. The policy is designed to provide the necessary indemnity to enable a business to achieve their financial results, which would have otherwise been achieved, had the material damage loss not occurred.

Business Interruption insurance is so vast that it is not possible to cover the subject in its entirety on this platform. Therefore, this article addresses only the most common elements of Business Interruption insurance.

Defined Events

A defined event is considered to be an event which causes loss following interruption of/or interference with the business. A business owner is covered for the  consequence of loss or damage occurring during the period of insurance in respect of which payment has been made or liability admitted under the underlying material damage insurance policy.

Measuring the Loss

Comparing turnover figures before and after the damage is generally a satisfactory basis for measuring the effect of the reduction in earning capacity of a business because of damage. However, the yardstick or alternative may also be loss of revenue or even loss of rental. Sufficient provision should be made to appropriate adjustments for extraordinary circumstances and business trends.

The standard policy wording makes provision for all the definitions and methods to settle claims in terms of the policy.

Additional Expenditure

The occurrence of damage and consequent interruption to the business will inevitably involve additional expenditure to minimise the loss in turnover and to return the business to normal operations as quickly as possible.

Thus, indemnity for financial loss resultant upon damage must also provide compensation for additional expenditure which is undertaken to reduce prospective loss of turnover.

This cover is provided for in the standard policy to the extent that additional expenditure does not exceed the loss in gross profit incurred (the economic limit: the policy will not pay more than R100 to save R100).

Settling the Sum Insured

In settling the sum insured against the gross profit figure it is essential that projected figures reflecting the anticipated financial results be utilised as those of the previous financial year will not take cognisance of increasing trends, planned changes and growth for the future, or other factors such as economic inflation on future turnover and gross profit.

Based on a maximum indemnity period of twelve months and on the basis that the damage might occur during the last week of the policy insurance period, the forecast projection will need to be made two years into the future.

In those cases where the maximum indemnity period is longer than twelve months, the forecast projection must be done accordingly to cater for such extended maximum periods of indemnity.

Sum Insured in Relation to Indemnity Period

When the maximum indemnity period is twelve months or less, the sum insured should not be less than the amount of the estimated annual gross profit which may potentially be achieved in the future.

With a maximum indemnity period of less than twelve months, the estimated annual gross profit figure remains that to be insured, but the premium will be adjusted (reduced) to make allowance for the shorter indemnity period.

In the case of maximum indemnity periods exceeding twelve months, the sum insured should represent the estimated gross profit which will be earned in the future during the corresponding period.

Whilst the loss may be instant, the Insurer may delay final settlement of the claim to the end of the indemnity period. This practice does not happen very often, and normally there is a reason for such action.

Some Business Interruption policies (especially in the Engineering Insurance sector) may have a time deductible prior to the inception of the indemnity period. On the other hand, interim provisional claims payments are usually made to the Insured to keep his business “afloat”.

If you would like to speak to an expert, please contact your Broker directly, who in turn may then need to approach Consort to assist with your requirements.

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