Many businesses are aware that having business interruption insurance in place is essential part of protecting their business but what is the indemnity period under a business interruption insurance policy and what factors affect your decision on how long the indemnity period should be? Firstly a quick review of the protection provided by a business interruption insurance .
The business interruption policy is designed to mitigate the financial effects of an interruption in the normal trading of a business as a result of a material or property damage insurance claim. Classically, assuming the building is partially destroyed by fire and normal trading cannot continue until all remedial works have been undertaken and the business is back functioning normally.
At its core the business interruption policy provides the financial help to the policyholder to ensure that the business can continue to meet it’s fixed costs and to provide for the net profit within the business.
This can obviously take some time to achieve and it is the period of this interruption to “normal trading” that we are concerned with when considering the indemnity period or more correctly, the maximum indemnity period.
What is the indemnity period on a business interruption policy?
The indemnity period or maximum indemnity period, is the maximum length of time specified in months, that the policy will support the business following an insured event causing an interruption to the business.
It is vital that proper consideration is given to the maximum indemnity period when arranging cover as the effects of a significant claim at the premises can often be underestimated.
How long should the maximum indemnity period be under a business interruption policy?
At best an informed estimation is going to be the best effort you are able to make in deciding upon the indemnity period you require. The factors will differ from business to business and indeed from claim to claim, but certainly the major considerations are;
Buildings can be affected by both total and partial losses, for some smaller losses there may be interruption in trading at all or only minimum disruption, but for more significant and total losses there are a whole range of issues that can affect the process including, site clearance, changes in building regulations, planning permissions, the ease of access to the site.
Business Contents and Machinery
Many business build up there machinery , plant and tooling over many years, sometimes acquiring second hand stock, sometimes newly commissioned equipment designed specifically for them. Over the years this is almost a natural process of planning and sometimes taking an opportunity that presents itself. In the event of destruction of the plant and equipment, there is not the opportunity to take years to re-equip the business. Plant and machinery will have to be acquired new and then the problems can start, what is the lead time, where is the plant manufactured, what is the commissioning time etc
Rebuilding of Customer Base
This can be one of the most difficult areas, if you lose your client base as a result of an interruption how long will it take to rebuild and can it be rebuilt?
What are the typical maximum indemnity periods under business interruption insurance policies?
Periods of 6M, 12M, 18M and 24M are common and there will often be a standard limit written into a policy, especially a package policy such as shop insurance but if these limits are not adequate you should consult with your broker and have them changed.
What happens if the business has not recovered at the end of the indemnity period?
There is no further cover in respect of that claim after the maximum indemnity period has expired.
How is the renewal date of the policy affected by the indemnity period?
These are entirely separate and have no bearing on each other.
The renewal date is when the policy, the contract of insurance is due for renewal.
The indemnity period is a specified period dating from the interruption to the business.
For example a policy may have a claim and subsequent interruption in trading the day before the policy is renewed. If the policy is not actually renewed the insurer will still have a liability in respect of the claim for the maximum period of indemnity from the date of the claim.