Business interruption insurance can help minimise losses and get back on track faster
Few scenarios are more devastating to small business owners than when events outside their control force their business to close. Unless, of course, the circumstances cause irreversible damage to their store, warehouse, or equipment. On top of the cost of replacing equipment and stock, business owners are unable to generate revenue. It’s insult added to injury.Most Aussie business owners know they need to prepare for the unexpected. But without a business continuity plan and business interruption insurance, the losses from unforeseen events can stack up quickly.
The biggest threats to Australian businesses
Theft, equipment damage and accidental loss are one thing. But widen the scope a little, and you’ll start to see greater risks to business continuity:
Climate change is increasing the frequency of natural disasters in Australia. Bushfires, flooding, drought and severe storms can all strike unexpectedly, causing devastating losses to local businesses.
Accidental fires are not an immediately solvable problem. Often, the structural damage, smoke damage, ongoing investigations and repairs force a business to stay closed for months.
Damage to neighbouring premises
What happens if the warehouse next door catches fire? Neighbouring buildings damaged in a blaze will be closed for a long time while repairs and investigations carry on.
Business interruption is not always a physical event. During the pandemic, we’ve seen the effect of lockdowns on local businesses. Governments can order a company to close for many civil reasons besides a global pandemic.
Why Aussie businesses need a continuity plan
All these events turn off revenue taps, potentially for months while a business recovers and rebuild. But there are still expenses; rent, utilities, taxes, loans, temporary relocation, plus the direct costs generally covered by business insurance, equipment insurance or motor vehicle insurance.When disaster strikes, having a business continuity plan – and business interruption insurance from Connect Business Insurance – can help business owners to weather the storm with a level head. Business interruption insurance alleviates added financial burden, so they can focus on re-starting a stalled business.
How to create a business continuity plan
Step 1: Identify the threats
Potential business risks include everything from natural disasters to neighbouring premises damage. Mapping your unique risks is the first step to creating an appropriate, stepped-out response plan.
- Assess the severity
Some events present more significant risks than others. Assess each risk in terms of how much potential damage it could cause, both immediately and in the long term.
- Consider secondary risks
Severe storms cause a great deal of damage in a short time. But the secondary risks of storms, such as prolonged power outages, structural damage to neighbouring buildings, road closures and government-mandated restrictions, can cut off your income stream after the storm has passed.
- Don’t forget your supply chain
Consider risks upstream and downstream of your business. For example, if you source essential material from a supplier in a politically unstable or environmentally hazardous area, what would happen if that supply suddenly stopped?
Step 2: Map a response plan for mission-critical areas
Unfortunately, you can’t mediate every risk. But you can have a backup plan in place should an unexpected event suddenly turn things upside-down.If an unexpected event forces your business to partially close, is there an alternative avenue to minimise losses in that area? For example:
- Road closures due to flooding or fire hold up a haulage operator. To keep some revenue coming in, they begin offering storage solutions for local businesses until the disaster passes.
- Supply to a fresh produce store is suddenly cut off. Rather than closing the doors, they temporarily rent out space to local producers until they secure a new supplier.
Of course, pivoting in the face of unexpected events is not always possible. In those cases, business interruption insurance is your first line of defence against ongoing losses.
Step 3: Insure against losses
Business interruption insurance is an essential safeguard when an unexpected event makes running your business impossible. Not to be confused with business insurance, business interruption insurance covers you for lost income and ongoing costs.
- Lost revenue while your business is closed
- Temporary relocation costs
- Ongoing fixed costs like wages, rent and utilities
- Taxes and loan payments
- Additional expenses to reduce loss or maintain normal operations
Business interruption insurance helps business owners to stay afloat during forced closures. Depending on the risks identified earlier in your business continuity planning process, you can elect to extend business interruption insurance from the standard 30 days up to 12, 24 or 36 months.
Step 4: Spread the risk
Insurance is one effective way to minimise business interruption risk. Other ways you can spread the risk to lighten the load are:
- Storing stock in multiple locations
- Investing in new revenue streams
- Setting up an online storefront
- Sourcing from suppliers in different places
Some alternative paths may be fallbacks that you call on in a disaster, while others can open up new growth avenues and secure a steady supply of essential goods.
What does business interruption insurance cover?
RevenueRevenue lost during the period your business is forced to close, based on historical revenueTemporary relocationCosts of temporarily moving so you can maintain or re-start operationsFixed costsFixed costs like payroll, rent and utilities, calculated based on past operating costsExtra expensesReasonable expenses that help you get back up and running, beyond the fixed costsCivil authority ingress/egressCosts related to government-mandated business closuresTaxes and loansLoan repayments and taxes incurred during long-term business closuresCommission and trainingThe cost of equipment and training to re-start your businessYour specific policy will outline inclusions in more detail. It’s always a good idea to check the business interruption insurance quote and PDS to see precisely what is and isn’t covered. Most policies will have exclusions and claim limits.
Does business interruption insurance cover COVID-related losses?
Unfortunately, business insurance is unlikely to cover pandemic-related losses in Australia. We have more information about why on our blog. ASIC has more about this topic on their website, and our insurance experts are happy to discuss your specific policy exclusions at any time.Thankfully, other avenues exist to recoup coronavirus-related losses, such as government support and trade credit insurance.
Get a quote on WA’s best business interruption insurance
Business interruption insurance is an essential part of a well-rounded business continuity plan. Here at Connect Business Insurance, we tailor business insurance policies based on your needs, including comprehensive business interruption insurance that can be a lifeline during unforeseen events.Request a quote online today and be prepared for whatever tomorrow brings.