As a reservist in the Army I am constantly bombarded with rhetoric about planning. There are numerous acronyms to be used during the planning stage of any operation and there will always be some old guard shouting something about failing to prepare being akin to preparing to fail or every old and bold sergeant’s favourite – ‘Prior Preparation Prevents Poor Performance. Actually the adjective ‘poor’ is extended slightly by the use of a rude word but this is a professional blog, not the 1950’s national service. Suffice to say that for every little task in the Army preparation and planning is key. There always needs to be a plan b and for that matter a c & d. So why do we not see this as much in the world of business?
If you are a business owner then imagine for a second your premises has been burned to the ground, if you are a home owner imagine it to be your home. How have you planned to deal with that situation? I suspect the immediate and most obvious answer is ‘I’ve got insurance’. Well that is important so that there is at least a mechanism for paying for the physical rebuild of said property and lost contents, stock etcetera (and because it keeps me in a job) but now imagine that it takes 4 weeks for a full fire and if necessary police site investigation to be carried out before you are properly able to assess the site with an insurers loss adjuster. It then takes 8 weeks to find an appropriate architect to draw your new house / office / warehouse etcetera. Another 6 weeks for the planning to get granted, 2 weeks of tooing and frowing. We are now 5 months in before any building has even been done…. Then there is sourcing materials, a contractor, building, final fix, furnishing and fitting… All starting to seem a bit daunting.
A race against the clock to get building work done puts me in mind of a kids book I used to have (a good few years ago now) called Mike Mulligan and his steam shovel. Maybe I was destined to write this blog all these years later.
Business Interruption is a section within most commercial policies or can be purchased as a separate, bespoke cover if necessary. Often for small businesses a standard cover will apply which is what many people settle on, particularly as the benefit of the cover is not as tangible as something like fire or theft cover. This is the danger of obtaining your cover through an online search engine, there is no one there to give you the proper advice. Business interruption is exactly that, cover for the consequential losses following an interruption to the business. This can be covered in the form of Loss of Income, Increased Cost of Working or more commonly the Loss of Gross Profit. This cover will continue to pay out until such time as you are trading to the same level you were prior to the loss NOT, it is important to note, simply trading again. Anyone in business who supplies a product or service knows that retention of customers is key, especially if whatever you do is generally repeat business. Assuming your customers need this product or service on a reoccurring basis you can imagine even the most loyal customer is going to need to source their items / service from somewhere else whilst you get back on your feet. If getting back on your feet takes a year then it will be a hard task to persuade these customers to come back. How will that occur? Will you need to spend money on additional PR? Who will pay for that? Well luckily if you have had the correct insurance advice these expenses could be encompassed within your cover.
Adding the length of time to win back your customers to the timeline we have already discussed with regards repairing the physical loss could take us a huge length of time and still most purchasers of online cover still only opt for a 12 month period of indemnity – clearly inadequate as we have discovered.
The Insurance Times recently ran an article (see their September edition) which highlighted a case from the Buncefield disaster from back in 2006. Not far from our offices here it highlights immediately that it is not just incidents at your own premises that might trigger the need for business interruption cover. The Insurance Times referenced a firm that supplied laser cutting equipment whose building was damaged along with some stock and delivery vehicles. Whilst the company found new, near-by premises within a couple of weeks, replacement equipment and stock took between one week and fourteen months to get hold of. It was reported that 50% operational capability was restored within six months and 75% within a year. Delays through this incident in processing orders meant the company lost 62% of it’s revenue for the first year post-incident and then 27% the next. All told the company was fully back on it’s feet and trading at its pre-loss capacity 21 months after the event. Unfortunately for the company they only had a 12 month indemnity period and so the company were reportedly unable to recover around £1,700,000 from the insurers, £1.2 million of which was gross profit and £500,000 additional costs.
So I hope the above has illustrated how important it is to consider the ‘what-ifs’ and to have a plan in place. Prepare the ground by having alternative suppliers identified, a means of liaising with your clients to try to retain as much as possible, identify alternative sites. Insurance should form part of your preparation and recovery plan but of course it cannot be the whole answer. If you haven’t spoken with your Broker about business interruption cover then the chances are that you are not adequately insured. For solid, honest advice please contact us. We’d be happy to chat through your business interruption needs, even if your policy is not due for renewal. Waiting until renewal might just be waiting too late.