A Guide to Business Interruption Insurance

It's easy to think that disaster will never strike. If you're running a successful franchise, you probably want to push the prospect of disaster to the back of your mind. But it is far more effective to ensure that you have the right protection in place just in case the worst does happen.

As a franchisee, there are several different types of insurance that you'll need to consider in order to protect your business successfully. Very often when investing in franchise protection, franchisees only think about physical damage that results in insurance claims. Far too few consider the financial impact that a disaster can have on their franchise. Business interruption insurance protects against this.

Here's a guide to the often-overlooked business interruption insurance. Read carefully – this could be the difference between the survival or failure of your franchise if you have to cease trading temporarily.

What is business interruption insurance?

Business interruption cover is intended to protect your business against the financial loss experienced as the result of a property claim.

While your buildings and contents insurance will cover the physical damage that fires, floods and storms can cause, business interruption insurance protects the income that you would have generated had you not had to make a claim.

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What does business interruption insurance cover?

Business interruption insurance can be complicated, and policies can involve very technical language. This is why it's important to share your franchise information with an insurance expert or broker to ensure that you get the cover you need. Each insurance policy will have a combination of standard and optional covers available. To avoid being underinsured, make sure you consult a professional.

Typically, a business interruption insurance policy will cover:

• Loss of profits – your profits are based on information such as your business’ previous performance and your finances.
• Fixed costs – this can include any operating costs you are liable for while your business is not operating.
• Temporary relocation – this includes any costs associated with operating your franchise from another location on a temporary basis.
• Additional expenses – this compensates you for any extra expenses over and above your fixed running costs during your closure.

These elements tend to be covered by your insurance policy from the time you are forced to close until your franchise can operate normally again. If you choose not to trade at any point outside of this period, you’ll be responsible for any financial loss that’s incurred.

By the end of the claim period, you should be in the same financial position as you would have been had the accident never happened.

Who needs business interruption insurance?

What’s the best way to determine whether investing in franchise business interruption insurance is necessary for your business? Well, the simplest way is to consider whether you could continue to trade if your business property or physical assets were damaged.

If you’re running a home-based franchise and rely on a laptop, mobile phone and internet connection, the likelihood is that you could continue to run your franchise effectively if a flood affected the use of your home office. However, if you own and operate a retail franchise which includes expensive equipment and stock, the chances of you being able to serve customers after a fire has damaged the premises are low.

Just because business interruption insurance isn’t a legal requirement, it doesn't mean that you don't need the cover. Your franchise is your responsibility, and you owe it to the franchisor, your customers and your employees to protect it appropriately. The most successful franchises don’t leave anything to chance because they’re aware of the consequences of getting it wrong. But, if you’re uncertain, remember to consult an insurance professional.

What events does business interruption insurance cover?

Business interruption insurance is designed to protect your business from any property-related incident which results in your inability to trade. Most policies cover:

• Damage caused to property or equipment following a fire, flood or storm
• Damage caused to property or equipment as a result of vandalism
• The breakdown of equipment that’s deemed as essential to run your business
• Theft of essential business equipment

Some policies will also cover business interruption as a result of:

• Employees or customers not being able to get to your business premises
• Damage affecting the business premises of a critical supplier or customer
• Virus attacks, hackers or other cyber risks that cause business systems to fail

What are the consequences of not having adequate cover in place?

Without sufficient insurance in place, you may find yourself under unnecessary financial and emotional pressure to get your business back up and running if disaster strikes. Investing in franchise protection may be an expense that you’d rather avoid, but the truth is that the cost of a business interruption insurance policy is far less than the cost of getting back on your feet if the worst happens.

It isn’t helpful to think, “It will never happen to me.” According to research by Direct Line, over 550,000 small and medium-sized enterprises in the UK had to temporarily cease trading between 2014 and 2016.

How can I calculate the cost of business interruption insurance?

The exact cost of your insurance policy will depend upon the size and type of business you run. But, there is a way to predict roughly how much you will need to fork out to get cover. Chron.com suggests the following method:

1. Work out the cover period.

To do this, imagine the worst possible scenario – such as a fire or natural disaster – and think about how long it would take you to get your business back up and running. Bear in mind that you may need to contact your local council to secure a rebuilding permit. And allow yourself time to train new staff and buy new equipment. Most financial consultants recommend that you allow at least two years to get your business running as normal.

2. Estimate the amount of income you would make in the cover period.

Refer to your previous financial statements to make an accurate projection. Look at how your business has performed over the past year or two and adjust the figures in line with expected business growth or the health of the economy.

3. Estimate the amount of profit you would make in the cover period.

Take estimated business expenses such as staff salaries and inventory away from your estimated revenue. Again, refer to previous financial statements to make accurate predictions.

4. Work out how much it would cost to operate your business from another location.

Make sure you include the cost of renting a premises and/or equipment, utilities, transportation and staff salaries, benefits and compensation. Add this onto your expected profit.

5. Work out how much money you would save during the cover period.

Just as you would calculate how much money you’d lose, you should also think about the costs you no longer need to pay as a result of the accident. These could include utilities and building maintenance fees.

To do this, you’ll need to find out whether your landlord still expects you to pay rent on your business premises if it is damaged or demolished. If they do, make sure you factor in rental costs. You should also think about whetherall of your workforce will continue to be employed during the cover period. If not, add up the amount of money you’d save in salaries, benefits and workers compensation insurance.

6. Once you’ve finished, take this amount away from the figure you calculated in section 4.

This is the amount you should buy from your chosen insurance provider. It is also recommended that you consult an insurance professional, so that you have access to the best advice. By meeting with people who know what they’re talking about, you can make sure you know the best course of action to take.

What other insurance does my franchise need?

The type of business insurance you need to protect your franchise will vary depending on several factors. The most successful franchises understand the importance of getting the right type and level of insurance, and so you should spend time researching the right protection for you. Here are just some of the covers that you should consider:

Employers’ liability insurance – by law, you’ll need this cover if you employ people in your franchise. The insurance will protect you if an employee becomes ill or has an accident as a result of working for you.

Building insurance – protects your business premises against damage.

Business contents insurance – protects your business stock and equipment against loss or damage.

Motor insurance – if you have just one business vehicle or manage a fleet of vehicles, you’ll need the appropriate insurance in place – as you would for your personal car.

Public liability insurance – provides financial compensation if a member of the public is injured – or their own property is damaged – as a result of your business.

Professional indemnity insurance – this protects you if a business client makes a claim against you. This might happen if they experience any business or financial losses as a result of your business.