Know Risk is a community education program designed by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to improve our understanding of insurance and how it relates to managing the many risks we all face in life.
Loss of profit insurance - what is it and do I need it?
Who wants to lose their profits?
- KR Useful (1)
Loss of profit insurance might seem like a foreign term to you, but chances are you’ve heard of it before, just with a different name. Although it is sometimes referred to as “gross profit” insurance, these days, loss of profit insurance is more commonly known as “business interruption insurance”.
That’s all very nice, but what is this insurance you speak of?
Well, in basic terms, business interruption/loss of profit insurance ensures your business has some form of income when you aren’t able to operate and earn income as you usually would.
So, essentially, business interruption insurance covers the loss of profit your business will suffer as a result of damage from an insured peril — such “insured perils” typically include (but policies do differ in terms of what perils they cover) fire, floods, hurricanes, storms, earthquakes or volcanic eruption.
These types of events have the type of impact where it’s possible you may have to halt your business operations for a period of time or operate at a lower capacity, both of which will typically result in a loss of profit — the likes of which can range anywhere between being a minor blip on your business’s earning potential radar to completely obliterating your business altogether.
So, depending on the extent of the damage your business sustains, it’s possible that loss of profit insurance will actually keep your business from folding.
What other things does business interruption insurance cover?
In the event of an insured peril, business interruption insurance also covers what are referred to as “ongoing costs” — so things like salaries of staff, utility bills, lease payments or advertising.
Depending on the type and nature of the business interruption insurance policy, it may even cover the costs involved when you have to temporarily move your business operations elsewhere, which might include the rental of other premises and associated relocation costs.
Are there things I can be doing to minimise the risk without insurance?
The answer to that question is, in most cases, a rousing yes — and this case falls into the category of “most cases”. Even if you do have business interruption insurance in place, there are a number of things you might consider doing to minimise both the possibility of an event that will prevent your business from operating and the damage caused by such an event.
Some of these things include, but are not limited to:
- taking all necessary precautions to ensure the occupational health and safety of those employed in your business is as assured as possible
- making sure any buildings used in the operation of your business are up to code, particularly in relation to fire precaution requirements
- having appropriate safety alarm systems in place
- ensuring ceiling sprinklers are installed
- making sure your employees are properly trained in all areas of fire safety
- conducting regular evacuation drills so that everyone knows what to do in the event of an emergency
- ensuring any electrical appliances (including computers) are not left in stand-by mode when they’re not in use
- keeping the power boards used in your business from being overloaded (so definitely no double-adaptors on a power board)
- making sure if any kind of hot works (so, for example, welding, grinding, etc.) are involved in the operation of your business that such activities are carefully controlled.
It’s important to note, however, that while you should be doing all of these things in the interest of safety (and also because most of these things are common sense/required by law), the types of events that can interrupt a business and cause loss of profit are at times unavoidable.
So, what you’re saying is that I still need business interruption insurance?
What we’re saying is that you should seriously consider it, particularly in light of the fact that statistics compiled by the Insurance Council of Australia over a number of decades show that 70 per cent of businesses without business interruption insurance eventually fold when a storm, fire or other event prevents the business from operating for a period of time.
But ultimately, as with all insurance decisions, it comes down to how much risk you are willing to bear and how important peace of mind is to you in the grand scheme of things. Those things are so subjective and we don’t have any kind of expertise when it comes to the nature and detail of your business, so we’re not exactly well-placed to be telling you what you should and shouldn’t do when it comes to business interruption insurance.
If you’re still in two minds and aren’t sure whether or not you need business interruption insurance, discuss your options with someone with appropriate qualifications and knowledge of your business and its operations. And if you do decide to go ahead with a policy, consider enlisting the help of a broker or financial adviser who can ensure the policy you have in place is one that aligns with your business and the needs that are specific to it.