Business Interruption

This cover is extremely important to the longevity of your business.

Unfortunately this cover is little understood by many and therefore can be considered as a luxury, however a luxury it isn’t, Business Interruption should be considered a necessity.

For the Sign Industry there are numerous ways to protect your business against loss of income following an insured loss. Much of this depends on how your business works and what you do.

For most sign businesses there are two main ways of covering business interruption, the first being on a Gross Profit basis and the second is Increased Cost of Working (ICOW).

To most of you reading this your business will probably be manufacturing, in which case we would always recommend a Gross Profit basis as you will be premises based.

If you are purely installing there will be a bias towards ICOW, this will be explained later, for now we will concentrate on Gross Profit and the basics of how it all works.

Business Interruption covers the loss of Gross Profit due to a reduction in turnover following an insured material damage loss, eg; fire, theft, storm, flood etc. It will NOT cover such things as customers who don’t pay or have gone out of business without paying you.

Gross Profit business interruption is calculated based on your ANNUAL gross profit. In very simple terms gross profit for insurance purposes is your Turnover LESS your purchases (Purchases’ refers to directly consumable items of stock and raw materials and not to purchases of equipment, machinery, utilities, office supplies and the like.) And must include wage rolls.

A simple way of ascertaining whether the Gross Profit sum insured on your policy is on the right basis is to get the following information in the right order. Your turnover (cost of sales), your Gross Profit and then your wage roll.

Write these down below each other, turnover at the top, gross profit in the middle and wages at the bottom. If they do not decrease in monetary terms from top to bottom you will need to be questioning why.

If your wage roll for example exceeds your gross profit then you have a problem, one of them is wrong.

Indemnity Period

How long will your insurer pay? This is known as the Indemnity Period. Refer to your policy schedule and establish your indemnity period, the chances are it says 12 Months. We continually see a standard of 12 months, (SignElite is 24 months as standard) many times without thought for the consequences of a total loss.

Establishing an indemnity period may not be as simple as you may think, consider the following:

How long will it take to rebuild the building you are in? Whether you own the building or are a tenant if you can think of a number, then double it. It won’t go to plan and will take longer than you think. Any specialist machinery may take a considerably long time to obtain. If you have any specialist machinery also consider whether it is obtainable at all?

The intention is that business interruption will put you back to the position you were in before the incident happened. Most will firstly look to the time it takes to rebuild a property and reinstall the machinery.

Indemnity Periods are very important and whilst 12 months may appear to be a long time, in reality rebuilding entire premises can take longer and then once you have you building back, your machinery installed, where have your customers gone?

Your contracts can be overlooked. Consider this, you have a contract with XYZ Co to supply signs for their shops around the UK, you have been supplying them for some time and you are mid-contract when a fire occurs at the premises (this may be out of your control and has started in a neighboring unit and spread to your premises).

Supplying your customer suddenly grinds to a halt – the result is an instant reduction in turnover and what’s even worse, despite your very good relationship with your customer, they can’t wait for you to be up and running again! The result is that they have to move their business to another company and, of course, there will be a queue just waiting to take it from you.

Multiply this scenario by the amount of contracts that you have, whilst this may apply more to the larger business even a single contract lost in a small business can be devastating

Overview

Business Interruption is a very complex subject in its own right and the above doesn’t really scratch the surface. Every business is different and independent advice should be sought as to the adequacy of the cover you have.

The intention is to give a basic explanation to highlight whether the type of cover you have is sufficient and to provoke you to consider a review if you think it’s incorrect.

Many policies give additional extensions as standard which have not been discussed above, these include Denial of Access, Failure of Public Utilities which can be critical to most businesses, there are others that affect the Sign Industry but these will be discussed in more detail at a later date.

Increased cost of working (ICOW)

This cover should be considered very carefully, it isn’t for everyone and does very much depend on what you do in the sign industry. If you manufacture or part of your business is manufacturing we would recommend insuring on a gross profit basis as above.

What is ICOW, pretty much exactly what it says, it covers increased costs to the business only.

As an example of this, you are working from office premises where your business is purely organising the installation of signage and you suffer a loss at these premises. Your cover will respond by providing additional expenses only for moving to alternative premises, moving services and other costs that may be associated.

What’s best for your business? When you contact us to discuss your sign business insurance quote and review we can look at the best option that suits you and your business.