A disaster suffered by a company (fire, flood, natural disaster, etc.) can disrupt its activity and lead to financial consequences, sometimes very serious. Insurance contracts intended for professionals and businesses offer tailored responses.
Business interruption insurance
After a disaster, the affected company must face a drop in activity which can be long, or even a total shutdown of its production leading to significant financial consequences. Operating loss insurance allows the company to offset the effects of the reduction in turnover and to cope with its fixed costs as well as a drop in its profit by covering permanent overhead costs (depreciation, taxes, rents, staff remuneration, loan interest, etc.). This insurance will also help the company to bear certain additional costs resulting from the disaster.
The compensation paid under the guarantee for operating losses allows the company to be placed in the financial situation that it would have been in if the incident had not occurred. The insurer and specialized experts are also looking for solutions to ensure that activity resumes as quickly as possible.
Events covered by business interruption insurance
The company can in particular insure itself for operating losses due in particular to the following events:
– fire, explosion, lightning strike;
– accidents to electrical appliances;
– water damage;
– machine breakdown;
– storms, hail, and weight of snow on roofs (only the storm guarantee is mandatory);
– natural disasters (guarantee must be issued when taking out the insurance contract);
– impacts from motorized land vehicles;
– riots and popular movements, vandalism;
– attacks, acts of terrorism (guarantees must be granted upon subscription).
The conditions of compensation
Business interruption insurance will only compensate the company on the condition that the latter has also taken out insurance covering a sufficient amount for direct material damage caused by the covered events (fire, explosion, water damage, etc.).
Guarantees offered to businesses by insurance
When a guaranteed event occurs during the coverage period, the insurance covers:
– the loss resulting from the impossibility or difficulty of compensating fixed costs and generating profit due to the drop in turnover caused by the interruption or reduction of activity, also called loss of gross margin (turnover – variable costs including salary costs);
– reimbursement of additional operating costs incurred in agreement with the insurer, following the incident, to limit the consequences (rental of equipment or premises, temporary installations, use of external manufacturing, exceptional transport costs, advertising, direct mail, etc.).
For the company, these guarantees are intended to cover expenses which, although directly resulting from the incident, are not compensable under basic insurance, namely:
– additional costs incurred in order to maintain on-the-market products and/or services provided by the insured company in order to avoid an irremediable loss of customers;
– any late payment penalties payable by the company in application of contracts concluded with customers, as a result of the delay or absence of delivery following a covered loss.
A disaster that affects a supplier, a subcontractor, or a company located nearby can have repercussions on the activity of the insured. The insurer may offer warranty extensions to cover the consequences of material damage which, even if it does not affect the insured company, nevertheless causes a reduction or even an interruption of its activity.
The company can guarantee, under certain conditions:
– the failure of suppliers of raw materials, packaging, and supplies, or the failure of subcontractors, service providers, and customers under certain conditions, if they themselves have suffered material damage resulting from a fire or explosion;
– the impossibility or prohibition of access to the premises of the insured company due to an incident occurring in its immediate vicinity.
The compensation period
This is the period during which the company estimates that its activity will not have returned to normal after a disaster. It is up to the company to set the maximum guarantee period at the time of signing the contract. It is important to remember the period that will allow the company to restart but also to regain its full financial and commercial balance as it would have been in the absence of the disaster.
To assess the duration of the business interruption, many elements must be taken into account:
– the time necessary for the reconstruction of buildings taking into account all regulatory constraints linked either to town planning or to the activity;
– the time for equipment replacement and replenishment;
– product manufacturing times;
– the seasonal nature of the activity (the compensation period must then include the peak period and correspond to one or more annual periods);
– the possibility of maintaining partial activity on the site despite the disaster or on another site;
– the existence of bottlenecks, production crossing points, and other nerve centers whose destruction would lead to significant and/or long-term paralysis of production (computer centers, centralized boiler rooms, etc.);
– the possibility for the company to subcontract sensitive operations.
It can be concluded that business operating loss insurance is something that must be in place to prevent companies from falling into bigger or even unmanageable losses. There is always the possibility of something bad amidst the company’s activities and business operating loss insurance minimizes the worse effects.