CONSEQUENTIAL LOSS OR BUSINESS INTERRUPTION INSURANCE:
1. Pays the continuing (standing) charges of the business that can no longer be met out of reduced income. These are charges that do not reduce proportionately to any reduction in the business. Some may reduce a little and others not at all
2. Pays the extra items of cost (increased cost of working) that arise following a loss. These could be: overtime for employees, costs of moving to temporary premises etc
3. Will pay sufficient money to maintain the level of net profit of the business.
4. Because of the necessity to pay standing charges a small reduction in turnover can wipe out the profitability of the business.
THE INDEMNITY PERIOD:
1. Represents the time during which the business is affected by a loss
2. Represents the maximum period that the insurance policy will pay the claim
3. If the indemnity period is too short the business will suffer severe financial difficulties and could cease to trade.
4. Time factors will involve an analysis of factors under buildings, machinery and stock
SUMS INSURED (Gross Profit)
1. Two methods of calculating the Gross Profit
a. Standing charges + Net profit
b. The Difference basis =
(Turnover + closing stock) - (Working expenses + Opening stock)
2. We next need to allow for the indemnity period. Consider:
a. Financials used are from the last financial year
b. Assume a claim falls due on the last day of the insurance policy
c. Allow for trends in the business, for example annual growth rate of 12%
d. Allow a margin to cover unforeseen developments
e. Wages
i. Sums insured should include payments to retained employees
ii. For wages in lieu of notice we can use the current level of wages
f. Insurance of wages
i. Insure in full for the whole period. Expensive but ensures that skilled and experienced employees are retained. Enables the business to retain their employees
ii. Payroll basis, need to know:
1. Amount of gross profit (excluding payroll)
2. Payroll amount
g. Pro rata wages; covers "notice wages", note no allowance is made for employees retained
h. Dual Basis; covers both notice period and continuing wages for selected staff. For example may cover full wages for 21 weeks and then 30% of the wage roll for the remainder of the indemnity period.
OTHER INSURABLE ITEMS
1. Professional accountant charges. Additional accountancy work required to help put together the insurance claim
2. Advance rent. For property owners with buildings in the course of erection a fire or other loss may defer completion and defer the receiving of rent. Cover normally provided only where the buildings have already been let.
3. Advance profits. Similar to advance rent, for existing businesses equipping new premises the Gross Profit calculation is relatively easy to calculate. For new businesses this is more problematic
4. Additional increase in the cost of working. For businesses where supply is vital, they may require increased costs of working beyond the normal payments. Applies to bakeries, dairies, laundries etc
5. Rent. Can be covered under consequential loss policy or the main material damage policy
6. Rent payable. Best insured as a standing charge as part of the Gross Profit
7. Rent receivable. Lease may contain a rent cessor clause then rent receivable can be insures as a separate item.