Business interruption or is it Loss of profits?

Updated: May 17

Very few businesses will survive a fire or natural disaster without proper insurance!

I had my training as an apprentice in insurance with Santam in South Africa. I was fortunate to work in a business branch where we only dealt with business insurance and at a time when we still wrote out the policy document by hand.

Loss of profits insurance is also called business interruption insurance.

In my career, I had two businesses burned down. The first one had a loss of profits insurance, but the second did not.

In the first one, the insurance acted quickly. Accessors were on the scene within 24 hours and rented the client new premises within two weeks. They made substantial payments on the fire section to help the client buy stock.

In the second claim, they dragged their feet. There was no incentive for the insurer to act quickly, and the payment took months.

Both claims were with the same insurer.

Understanding Loss of profits insurance

Loss of profits coverage is generally tax-deductible as an ordinary business expense. These policies only cover the loss of business income unless a specific property loss policy covers its causes or claims.

What does loss of profit insurance cover?

Loss of income or additional expenses the client may incur after an insured event

What is the purpose of business interruption insurance?

To protect the business income from the same perils as on the fire section buildings combined section or office contents section. Without continuous income, the business will not survive.

Understanding Business Interruption Insurance

Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy.

According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days or two years. Cover in South Africa for at least six months.

Cover summary

Fixed costs: Operating expenses and other incurred costs of doing business.
Temporary location: Moving to and operating from a temporary business location.
Commission and training cost: In the wake of a business interruption event, a company will often need to replace machinery and retrain personnel on how to use the new machinery. Business interruption insurance may cover these costs.
Extra expenses: Business interruption insurance will provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the company gets back on solid footing.
Civil authority ingress/egress: A business interruption event may result in government-mandated closure of business premises that directly causes financial loss. Examples include forced closures because of government-issued curfews or street closures related to a covered event.
Covid 19 In South Africa, businesses in the hospitality industry had to pay claims according to a court ruling. The cover included a clause that covered an epidemic.
Employee wages: Coverage of wages is essential if a business does not want to lose employees while shutting down. This coverage can help a business owner make payroll when they cannot operate.
Taxes: Businesses must still pay taxes, even when disaster hits. Tax coverage will ensure a business can pay taxes on time and avoid penalties.
Loan payments: Loan payments are often due monthly. Business Interruption coverage can help a company make those payments even when not generating income.
Additional expenses are a different option where the risk is not a loss of revenue but the additional costs the client may incur. For example, the client may need alternative premises. A fire would not reduce the income.
The indemnity period is the time client is covered after an insured event occurs.
Revenue, another word for turnover
Turnover is the total amount of payment the client's business receives over an annual period.
Risks are the events the client buys cover for
The Gross Profit sum insured should include VAT. Reflect a 12-month period where the maximum indemnity period is 12 months or less—taking cognisance of a loss that may occur close to or at the end of the insurance period. Gross profit is the method used to ensure the majority of businesses. There are different ways to calculate gross profit. 1) Turnover less cost of production, 2) All standing charges plus nett profit. Gross profit is for the financial year.
Loss of profit is the purpose of this cover following physical damage for risks the insured buys cover for in the insurance policy.
Insurance products the sections in the schedule available to take

Questions & Answers

How do you calculate the loss of profit insurance loss?

Answer

The insurer shall pay the amount obtained by multiplying the gross profit rate and by the amount by which the actual turnover during the indemnity period falls short or the turnover which would have been achieved had the delay in start‐up not occurred.

The Gross Profit rate is calculated by taking the previous year's figures. Loss due to a reduction in turnover is calculated by applying the gross profit rate to the decrease in turnover.