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10 December 2018
Business interruption insurance is designed to help customers recover to the position they were in prior to a loss. It can make the difference between the collapse or survival of a business following an earthquake, fire, flood or storm.
BI cover is not designed to simply support a business while repairing buildings or replacing machinery, BI policies are designed to provide the continued financial support a business needs to return to its previous form.
Business interruption policies are unique in that they are limited by both a sum insured and a maximum indemnity period (MIP). Having the right indemnity period for your business and the right sum insured are equally important.
An indemnity period refers to the maximum length of time your business is paid by your insurer. When the maximum indemnity period has been reached, then claim payments will cease, even if the business is yet to return to pre-loss trading levels.
Cover is primarily triggered by damage (covered under the material damage - MD policy) that interrupted the business. It is covered by the date of the event, not when you wish to carry out repairs.
Inadequate MIPs are a common cause of underinsurance, as customers often underestimate how long it would take to recover following a loss return to former levels of profitability. Even after property has been reinstated, it can take a significant amount of time for a business to win back lost customers, train new staff or integrate new equipment.
After the 2011 earthquake, many Canterbury businesses found themselves in a situation where their indemnity period had expired yet they were not yet trading to pre-loss levels.
Other businesses found themselves in the situation where, through no fault of their own, they are yet to use their BI policy, but are likely to incur a loss of profits in the future. However, their indemnity period and ability to claim had expired.
Business owners often believe, mistakenly, that interruption indemnity periods can be deferred or extended by default. However, this is simply not the case for most policy holders.
At Crombie Lockwood we offer longer deferment periods with our business insurance packages. We allow policyholders the choice to delay the triggering of their indemnity period until their business is affected, as opposed to the insurance kicking in on the date of the damage, loss or event.
For example, a disaster occurs on June 1, 2017, but your business is able to continue. Repairs commence on May 30, 2018 -a year after the event - at which time you cease trading. If your BI policy has a 12-month indemnity, with a 12-month deferment, the insured period would run from May 30 2018 to May 30 2019, effectively covering you while repairs are being carried out.
Under the traditional "date of loss" cover, the indemnity period would have run from June 1, 2017, to June 1, 2018, meaning you could be short-changed.
Clients are now able to decide if there is any possibility of more significant costs outside of the indemnity period of say 12 months, and whether they would prefer to defer the start of their BI claim.
Clients are able to defer the indemnity period to provide cover for building closures years later. Under the traditional method of BI response, cover for the losses or costs would not have been available.
A benefit unique to SmartPAK is that there is no limitation on the length of time that the indemnity period can be deferred.
We recommend that business owners take a close look at the terms of their BI cover and make sure their sum insured, indemnity period and cover are appropriate, or if they are uncertain, to seek expert advice. Talk to us about SmartkPak – the business insurance packages for smart business.