Any disaster generally has an impact on the activity of the company: a drop in activity or even a total absence of turnover. expenses: payment of suppliers, reimbursement of credits, payment of salaries and social charges, etc.
Business interruption insurance allows him to cover himself against this risk, by means of the payment of an indemnity to the company, with the aim of restoring the financial situation as it was originally.
Risks covered by business interruption insurance
The implementation of business interruption insurance is subject to the existence, on the day of the claim, of insurance covering a sufficient amount of direct material damage caused by the events covered.
The claims that may lead to compensation for the company through the business interruption insurance contract are as follows:
Water damage, during a flood for example;
A storm , hail or damage caused by the weight of snow on the roof;
natural disasters ;
A fire or explosion;
Electrical damage and lightning strike;
The occurrence of a machine breakdown ;
Acts of vandalism , terrorism and sabotage;
Damage caused by riots;
Damage caused by aircraft and spacecraft.
Insurance covering business interruption
Several possibilities of operating loss insurance are available and the business manager has the choice between:
Take out basic operating loss insurance , which will compensate the loss linked to the drop or absence of turnover and the reimbursement of any costs that had to be incurred because of the disaster;
Take out additional guarantees to the basic operating loss insurance, to be compensated for the expenses necessary to maintain the activity and for any interest on late payment that the company bears because of the disaster.
It will be up to the manager, depending on the size of his company, his sector of activity and his analysis of the risks of his company, to determine the level of guarantees to be fixed in his operating loss contract. A preliminary audit of the situation by a professional insurance broker may prove to be judicious in this respect.
Compensation for business interruption
The compensation period is set in the business interruption insurance contract . The business manager will be responsible for setting this period, in particular by estimating the time necessary for him to get his business back on its feet if a disaster occurs.
The compensation period set in the business interruption insurance contract generally lasts between 1 and 3 years .
The entrepreneur will have to ask himself the right questions to determine the period of compensation he wishes to benefit from through his business interruption insurance contract. In the event of a claim, the following questions may in particular be useful in the context of this process:
Is there a risk of having equipment to replace? If yes, how long should it take for the replacement?
Will the company have to completely stop its activity or will it be possible to continue partially?
Can we change our mode of production, for example by subcontracting certain tasks, during the recovery period of the company?
What is our lead time for producing a product? (in the event that the products are also destroyed, it is necessary to count the time necessary to replace the damaged material, plus that necessary for the production of the products).
Amounts insured by operating loss cover
The compensation which compensates for the drop or absence of turnover takes the form of a reimbursement , thanks to the operating loss insurance, established on the basis of an amount which corresponds to the gross operating margin of the company.
The calculation of the gross operating margin consists of subtracting from the turnover the variable and fixed costs of the company.
Of course, it is not easy to determine this gross operating margin for future years, and it is possible to provide, in the operating loss insurance contract, for an adjustment of this margin (in return for additional contributions).