Is your indemnity period long enough?

An indemnity period is the time frame in which insurance companies will look to contribute towards a business interruption claim for loss of earnings. The indemnity period starts from the time of the initial loss and will operate while the rectification work is being carried out and will also continue once the business re-opens until it is deemed by the insurer that the company is back to normal trading (similar trading to prior to the loss, while also taking other factors into consideration).

Businesses sometimes underestimate the time it can take to return to the trading position they were at prior to a loss. It’s important to consider the suitable length of indemnity period that will cater for this.

Here are some real-life examples to illustrate what this could mean for your business:

Pub/Restaurant

A major fire broke out in the kitchen resulting in the building and equipment being damaged by fire, smoke and water. Initial assessment of the damage indicated that all equipment needed replacing with indicative lead times of around 6 months. Added to this, the building required complete re-roofing due to severe heat damage.

The logistics involved in dealing with the equipment removal and subsequent replacement roof indicated an overall reinstatement time of about 14-15 months. In this case a maximum indemnity period of 12 months was insufficient. It’s important for businesses to consider if maximum indemnity periods of 24 months or more is necessary.

Factory/Printer (supply chain failure resulting in loss of business)

The manufacturer of essential specialist machinery suffers a major fire and goes into administration. For its customer, it becomes very challenging to find compatible spare parts to make repairs or replace worn-out components, and ultimately some of their machinery becomes unusable. While either trying to source the parts or acquiring new machinery, they’re unable to produce to the usual capacity and fulfil orders. In this situation having a Suppliers’ Extension to their business insurance policy may provide cover for losses arising directly from the suppliers’ fire.

Retailer with a “hole in the wall” ATM

Overnight, the premises is subject to a “ram-raid” attack on the ATM machine which caused extensive damage to the building. It will take at least 8 weeks to restore the premises to a state from which the businesses can resume trading. The ATM itself may be out of action for longer so this highlights the need to think about every aspect of a business and what incidents might impact its revenue stream.

Insurance companies do not provide a standard cover for business interruption. However a lot of policies will have a default indemnity period, usually consisting of 12 or 24 months. When taking out any insurance policy businesses should consider all factors that could delay/add to the re-opening of a business following a loss, for example debris removal, remedial works, specific machinery and contents that could require bespoke ordering and time delays in attracting back the business that has been lost due to the closure.

To check if you have the right cover in place, speak to one of our commercial insurance experts today, who will be more than happy to help you.

Source: BIBA