Business Interruption and why you need it

We're revisiting some of our earlier Blogs at the moment. Mainly because there are a number of new followers who haven't had the opportunity to read them. This blog on Business Interruption was first released on 12th November 2012 after a serious fire in QLD. The news remains relevant today and a timely reminder about getting your Business Interruption cover right. By way of update the building we discuss below was a tilt slab concrete build with tenants being Toy's R Us, Autobarn, Clark Rubber & Sam's Warehouse. The Fire Wall which separates Sam's Warehouse from the other 3 tenancies saved Sam's Warehouse from destruction and a plan was immediately implemented to fast track the relatively unaffected tenancy. Have a read below of a case which clearly shows why Business Interruption is a must for the protection of your business.

Saturday we were faced with news of a fire ripping through a major shopping centre in Mackay QLD.

The enormous fire, which completely destroyed the Toys R Us, Clark Rubber and Autobarn stores, put much of North Mackay into Lockdown when an emergency situation was declared, causing major traffic chaos with local streets in gridlock. Thankfully no one was injured. It turns out a 13 year old boy has been charged with arson over the event.

 With only 6 weeks until Christmas this will have a major knock on affect with business and the community. Think about it. For starters the policyholders of the businesses. They would have been fully stocked and staffed as they gear towards Christmas retail. So they are now paying suppliers of stock for goods that are gone. They are also paying wages, rent, fixed overheads yet earning not a cent of income. So what do they do?

 First thing they may do after assessing the damage is lay off staff. These were major retailers so chances are they had staff of 20 or more. So if this happens we now have 20 families in the local area without work right on Christmas. For their own business there is potentially millions of dollars in lost revenue which impacts the long term viability of the firms. As a side note what about the thousands of dollars of Lay By's at Toys R Us in particular? Is there a contingency here or have all those lay by's gone and the community lost financially. The impact on our community from here is substantial.

No business should operate without a cover called Business Interruption. (BI) When I was working in QLD I had a period where I was close to the Autobarn account whereby we were putting forward an alternative program for them by tender. To my knowledge - as of 3 years ago - they held BI. Knowing the broker who works the account he wouldn't let them trade without it. Toy's R us and some of the others I personally am not familiar. BI provides a period of cover beyond a major loss that assists in cash flow. That's the simplistic version. From the moment the fire is extinguished it can be triggered and put into place. It is designed to help you get back to where you were prior to the loss as quickly as possible to lessen the impact on your business.

Think about what needs to be paid even though a business is temporarily closed. A disruption like this can have serious consequences. There is inevitably a reduction in turnover and hence a loss of profit that would have been earned from those sales. Often this can affect the viability of the business in question. There may be a loss or damage of plant and equipment, perhaps even injury to and loss of skilled staff. The loss can be aggravated, as valuable staff may be required to relocate to assist in the task of restoring production. The costs associated with retaining customers and market share and cash flow may create a drain on the financial resources of a business already stretched because of the material losses. It is to offset these costs and expenses to maintain the turnover/revenue that all businesses should take out business interruption insurance cover.

I lifted the below points from NIBA to help you understand some of the other problems suffered by businesses as the result of an interruption include:

• loss of profit margin on stock destroyed;
• dislocation of most general business activities;
• non-fulfilment of standing orders;
• breaking of contracts;
• loss of customers to competitors;
• certain continuing expenses, for example, rent, payroll, interest;
• additional expenditure in order to minimise loss of income to customers, like rental of temporary operating premises, or working additional shifts;
• the availability of replacement plant and machinery or parts for damaged plant and machinery;
• ongoing inability of the business to attract customers;
• a reduction in net profit – possibly a net loss.

Further stats show that;

•  Every year, 1 in 500 businesses will experience a severe disaster. (McGladrey and Pullen)
• 43% of businesses that experience a disaster never re-open and 29% close within 2 years. (McGladrey and Pullen)

As previously mentioned the knock on affect within a community is severe once such a disaster occurs with people out of work and less access to goods and services as just a few key points.

Business Interruption Insurance can be purchased Stand Alone or in conjunction with your Business pack policy. When we review your business insurance, BI is a key discussion. As we mention our philosophy is to be partners in the protection of your business. This isn't just covering your physical assets, it's ensuring we help you protect your staff and obligations. An event like what we witnessed over the weekend can happen anytime and anywhere. Please, talk to us about Business Interruption or have your current Insurance provider discuss with you.

** The above advice is General in it's nature. Please consider your own business needs when inquiring about Business Interruption and read the relevant PDS.