Australia: What is business interruption insurance cover? And do you need it for your business?

Last Updated: 29 February 2016
Article by Damian Clancy and Rory Butler

In brief - Business interruption cover creates a financial buffer following catastrophic events

Businesses which do not have business interruption insurance cover risk becoming unviable if they experience an unforeseen catastrophic event. Conversely, the very process of buying business interruption cover can lead a business to improve its risk management, thereby reducing the impact and likelihood of any catastrophic event.

Many businesses take great risks with their continued viability

Business interruption insurance cover has become a critical feature of the risk management strategy of many small to medium enterprises. However, many businesses continue to underestimate the importance of having this cover and, in so doing, take great risks with the continued viability of their business.

Professional development courses for insurance brokers almost invariably warn brokers that most businesses cannot continue for more than three months after the occurrence of an uninsured catastrophic event which interrupts the operation of that enterprise.

As the example below demonstrates, small businesses which do not hold any business interruption cover can suffer severe and long-term damage as a result of an unforeseeable and uninsured catastrophic event.

Medical practice building destroyed by catastrophic event

Mr and Mrs X conducted a medical practice in an exclusive inner-city suburb through a corporation. The practice was located in a building which housed a number of professional suites. The building was completely destroyed by a catastrophic event. The corporation did not have business interruption cover.

Landlord refuses to reinstate premises to previous condition

Shortly after the event, there was a dispute between the corporation and the landlord of the premises, who refused to reinstate the premises to their previous condition.

The alterations to the floorplan drafted by the landlord effectively meant that certain important medical equipment could not be housed at the premises upon their reinstatement. The corporation's only option was to pursue a protracted court/tribunal dispute over the landlord's obligations under the lease, which likely would have taken several months to resolve.

Medical practice forced to find new premises and pay for fitout

As a result, Mr and Mrs X were forced to source new premises at a time when the property market was booming, and then to fit out those premises at their own cost.

Even worse, they could not find suitable and affordable alternative premises within a 10 kilometre radius of their practice's former premises. Consequently, several patients of the practice transferred their medical care to competing practices.

No off-site electronic back-ups of patient records

Even worse, the corporation did not have any disaster recovery or risk mitigation strategy. At the time the practice's premises were destroyed, Mr and Mrs X (who were not technologically savvy) had not made off-site electronic back-ups of their patients' records. As a result, embarrassingly, the corporation had to call many of its patients and ask them to attend the premises so that their patient history could be reconstructed. Several patients were so appalled that their records had not been adequately protected that they transferred their care to other medical practitioners.

Adverse effect on financial position of business

In the result, the corporation lost approximately 50% of its patient base. Due to the substantial overheads in continuing the business after the catastrophe, the corporation operated at approximately 30% of its pre-catastrophe profit for three years and at the time of this article is still only trading at between 60 and 65% of its pre-catastrophe profit.

Improvement in risk management a possible side effect of purchasing business interruption cover

Creating a buffer against the financial effects of the catastrophic event on Mr and Mrs X's business through the use of business interruption cover could have eased the financial pressure on the business and reduced the substantial overheads they had to contend with. In this instance, business interruption coverage would typically have restored the loss of gross profit, a key component of a sustainable business, and left Mr and Mrs X with a more manageable and continuous operating environment.

As an added benefit, risk management and disaster recovery advice are often provided by insurers and brokers free of charge to mitigate the cost of the insured experiencing a catastrophic event. This is because the insured and the insurer have an aligned interest in minimising the financial burden of a catastrophic event - or preventing it altogether if at all possible.

Damian Clancy
Insurance and reinsurance
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Damian Clancy
Rory Butler
 
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