How Business Interruption Insurance Covers You from Risk

Business interruption is among the top risks that businesses of all sizes face globally. South Africa’s businesses aren’t spared from this and face serious business risks, including cyber-attacks and pandemics. This makes business interruption insurance in South Africa a necessity. This First for Women guide sheds more light on business interruption risk, its impact on businesses, why you need business interruption cover and what it covers.

What is a business interruption risk?

Business interruption risk means the financial loss an enterprise suffers due to the disruption of its day-to-day operations. Some losses, such as reduced turnover due to machine breakdown, are easy to observe, while others caused by reputational damage are more difficult to see. Whether financial losses are observable or not, the ultimate result for the business is that finances plummet.

Many business risks — such as fire, cyber incidents, natural disasters, breakdowns of critical machinery and pandemics, like COVID-19 and its variants — could interrupt the normal operations of a company.

To put a business risk into perspective, let’s consider the impact of the floods that occurred in KwaZulu-Natal in April 2022.[1], resulting in total financial losses estimated at R7 billion.

The floods damaged infrastructure of various kinds, including water, electricity and rail. This means that businesses that relied on water, electricity and/or rail transportation had no way of running their normal operations.

Certain business interruption risks — such as pandemics — affect some industries more than others. For example, when COVID-19 hit the world, South Africa went into a forced lockdown for months, negatively impacting the tourism sector.

In 2019, before travel restrictions, South Africa welcomed 21.8 million tourists. By the end of 2020, this number had shrunk to 6.4 million, which is a decline of 70.6% in just one year! Think about this impact on many small businesses such as restaurants and transport services providers.

The importance of business interruption cover

If you would like to be financially protected against certain business risks that disrupt operations, then you need to have business interruption insurance. With this specialised insurance, an insurer — like First for Women — protects your business in the event of financial loss due to a business interruption caused by things such as fires, industrial action or natural disasters.

Following a business interruption, your company’s operation either halt or fail to operate at the required capacity. This may happen from when the incident occurs and throughout the recovery phase. If you don’t have business interruption insurance, you will lose revenue.

When a business doesn’t generate cash flow due to a business interruption, it is likely to struggle to cover expenses such as payroll, licences, rent and  maintenance. Unfortunately, such a business may have to close its doors, perhaps for good. Business interruption cover can help a company get back on its feet.

Business interruption cover is sold separately from business insurance or it may be included as part of a comprehensive package. Take a look at the Complete commercial insurance checklist for businesses so you can be sure of what you will need to keep your business covered. 

Business interruption insurance: what’s covered?

There’s no standard business interruption insurance. Different insurers offer varied business interruption cover, and the level of insurance coverage will depend on your needs.

Your policy will have exclusions to protect your business and your insurer. You should know what your insurance coverage includes and excludes before signing the policy agreement to make a successful business interruption claim if you need to at some point in the future. 

Having said that, it’s important to note that most business interruption insurance policies cover the following: 

• Employee salaries and wages: No business wants to lose key skills when shutting down temporarily. This coverage of employee salaries and wages ensures that this doesn’t happen and allows the business to get back up and running as quickly as possible afterwards.

• Fixed costs: These expenses include rent payments and operating expenses.

• Temporary location: A business interruption might require temporarily moving locations to continue operations. Business interruption insurance covers the costs of seamlessly moving and operating at a new temporary location.

• Profits: Your policy covers profits you would have earned if your operations had continued undisturbed. The amount of profit covered will be based on your business’s previous profits.

• Taxes: Businesses pay taxes even if they’re victims of business interruption. Your policy covers for these taxes to ensure you avoid incurring costly penalties.

• Training cost: It’s not unusual for a business to use new and improved machinery following a business interruption event. Your business interruption insurance may cover the cost of training your team on these machines.

• Loan repayments: Most loans get paid monthly. Lenders expect your business to make good on its promise to pay its loans timeously. A business interruption event might threaten your ability to make these loan payments and thereby tarnish your business’s credit profile. Your policy may make these loan payments to ensure you stay on the good side of creditors.

As much as it’s important to know what your business interruption cover includes, it’s also vital to be aware of what’s excluded. The most glaring exclusion is income not included in your business’s financial statements. That’s why it’s essential that you keep your financial records up to date and accurate.

Get business interruption cover from First for Women

Unfortunate circumstances can hit your business when you least expect it. The negative impact of the disruption could include revenue losses. 

Fortunately, First for Women can protect you from such events that force your business into closure. It’s easy to get business interruption from First for Women. Simply contact us for a free and no-obligation business interruption cover quote.

Sources:

[1] Relief Web: Damage to KZN companies estimated at R7 billion

Disclaimer: The information in this article is provided for informational purposes only and should not be construed as financial, legal, or medical advice.