Business Interruption Insurance

Definition of Business Interruption Insurance:

Business Interruption Insurance (known as BI cover) is a type of insurance usually built in the industrial all risks insurance. BI covers the loss of profit after the insured event/damage by insured perils such as a fire. It also cover the increased cost of product till the factory returns to its normal operation and/or production.

Sum Insured for BI Cover:

Typically the insured takes coverage BI portion for a particular percentage (commonly 10%)of their gross profit. The calculation of the gross profit is shown below:

1. Combine figures of Closing Stock, Sales and Work-in-progress

2. minus the combined figures from opening stock, work-in-progress and purchase

3. Get the gross profit for BI insurance purpose.

In this page we have discussed the coverage of business interruption through example. Lets see the first example of technical aspect of BI cover.

How Much BI Should I Buy?

If after the happening of the insured event, the turnover reduces in proportion to the reduction in expenses, no BI policy is to be purchased.

If turnover reduces by 50 % and expenses 40%, BI policy is to be purchased for indemnifying the Insured to support particular expenses.

Practical example of BI insurance:

Supposed a decisions has suddenly been made by the management of TOM Group of Companeis in order to take Business Interruption Insurance for their TOMSON COMPUTER TECH at Narayanganj, Bangladesh. They decided it due the requirements by their financier.

Relation between IAR and BI Insurance:

In response to their proposal for covering BI for the entire project with BI Sum Insured being BDT 200,000,000, a lead BI insurer might like to highlight the following fact to the authority of TOMSON that BI coverage is traditionally provided with either build-in or extension to the Industrial All Risks Policy. Therefore the TOMSON group first has to insure their poverty with the insurer and then take coverage for BI portion.

BI is Integrated in to Industrial All Risks Policy:

There are two ports in Industrial All Risks Insurance Policy.

Part -I is Property Damage

Part-II Business Interruption

Therefore in the current insurance market in Bangladesh, no separate BI policy is issued due to the following technical reasons:

• BI indemnifies insured for in respect of (1) loss of gross revenue and (2) increase cost of working, following the operation of the coverage under the property damage section.

• BI indemnifies if the interruption or interference is caused by the insured perils under the property damage policy.

• The availability of fund by the insured to facilitate reinstatement may be inadequate and thus the burden of indemnification for BI insurer may be longer/ increased.

First Insure Property and Secondly Insure BI

A private insurer cannot cover the BI for the entire project unless it insures property damage section because of the following facts:

• Coverage under the existing fire policy is not comprehensive as required by standard BI policy.

• The exclusions of the existing policy along with their conditions and limitations of the existing fire policy may not suit those of the BI Policy.

• The delay in settling claims by other fire insures may lengthen the BI indemnity burden.

• The triggering events of BI coverage is broader than offered by Fire policy.

• It would be tough to successfully operate the BI policy due to mismatching of coverage.

• There may be some sort of under insurance giving rise to delay in the reinstatement process.

The Overlap in Fire and IAR Insurance:

If a company has several fire insurance policy in force but they intends ti buy BI cover, they have to buy IAR policy first to get the BI coverage associated withe the IAR coverage.

Best Solution options for TOMSON:

1. Insure with One Reliable Insurer through one comprehensive IAR policy including BI by cancelling all of the existing fire policies.

2. Insure with One Reliable Insurer through one comprehensive IAR policy including BI for the new sections for BDT 80,000,000 in property damage (including BI for 10% of the gross profits proposed) and include all other sections through necessary endorsement following their respective expiry.

3. Coinsure with One Reliable Insurer through one comprehensive IAR policy including BI by cancelling all of the existing fire policies.

If you still have any question about our today’s post “What is Business Interruption Insurance?”, you can contact me here as, In Bangladesh insurance market, the practices of BI covers vary.

Sources:

  1. Wikipedia, the free encyclopedia Business interruption insurance
  2. Insurance Information Institute Do I need business interruption insurance?

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