Ask yourself, what would happen if you had to cease trading for an extended period of time? You would still have overheads and running costs to pay – except that without an income you couldn’t. In a nutshell, that is why you may need business interruption insurance.
It’s insurance cover that can be used to pay for fixed costs such as rent, loan repayments and some wages and utilities, activated by an insurable event that prevents the business from meeting these commitments. It can also help compensate for profit the business would have earned. Further progress payments help to meet long-term expenses because, depending on the extent your operations have been affected, it could be months or over a year before you return to normal conditions.
Just look at what happened to Omar and Joe’s Pizza-babs*.
Case study: Starting with a prang
Two friends decided that their town needed a new kebab and pizza restaurant. They found a building they could rent, put down the bond, signed the lease and guaranteed the business debts by using their personal assets.
Pooling all the money they could raise from savings and taking out a bank loan to cover the shortfall, they bought the equipment they needed and fitted the premises out just how they wanted their eatery to look. After recruiting kitchen and counter staff they were ready to go.
Although they had spent all the money they had they were confident their cash flow would be okay once they opened the restaurant and sales started to flow in. After all, nobody else locally had a similar offering.
Unluckily for them, a couple of weeks after their eatery opening an out-of-control car accidently ploughed through the front of the restaurant, causing extensive damage to the equipment, fixtures and fittings.
The business could not reopen for three months and while their business contents insurance would pay for replacing the equipment and fit-out, with no income coming in they still had the rent, staff and other committed expenses to take care of.
Thankfully, they also had a business interruption insurance policy which provided progress payments to supply cash flow and replace earnings from business lost, allowing the partners to pay their fixed costs that continued accruing after trading stopped.
*Not the real name of the business
Manage your risk
These business partners had poured all their assets into their new venture, and then they had borrowed on top of that. They were completely reliant on turnover to cover their operating costs so it was just as well they had the foresight to take out business interruption cover. Otherwise the crash would have smashed their prospects as well as their fittings.