When dealing with business interruption insurance, one of the hardest things we sometimes have to do is inform a business owner that they are underinsured…usually after a particular incident has left them either temporarily or permanently shut down. Unfortunately, this is more common than you might think. Many business owner/managers buy an insurance policy and over the years rarely, if ever, review what they need for complete coverage as their business grows and evolves.
Some of the more common business interruption insurance policies that we see require the business to have insurance in place equal to 80% or 100% of an annual loss in order to avoid a ‘co-insurance penalty’. If you haven’t purchased adequate insurance you will only have a portion of your loss paid by the insurance company. A quick example can illustrate this – the owner of a gross profit policy with a limit of $500,000 and 100% co-insurance requirement experiences a fire and is shut down for six months. If the company’s gross profit (as defined by the insurance policy – not by accountants!) for the 12 months prior to the fire is approximately $750,000 the company would be considered underinsured as they have not insured 100% of the gross profit. In this example only 2/3 ($500,000/$750,000) of the loss of gross profit would be payable by the insurance company.
It is important to review your business interruption limits to avoid this problem should an incident occur. When reviewing your policy limits, make sure you understand the definitions set out in your policy – certain terms such as ‘gross profit’ may mean one thing in the accounting world and something entirely different in the insurance world.