A Guide to Business Interruption Insurance

19/04/2018 08:00 | Start a business

Interruption insurance for your franchise

It's easy to think that disaster will never strike. You're running a successful franchise, and you're sure something terrible isn't going to happen to you. Unfortunately, hoping that your business won't be affected by a disaster is not as effective as ensuring that you have the right protection in place in case the worst does happen.

As a franchisee, there are several different types of insurance that you'll need to consider protecting your business fully. But very often when investing in franchise protection, many franchisees only think about the physical damage that forces an insurance claim to be made. Far too few consider the financial impact that a disaster can have on their franchise. Business interruption insurance protects against this risk.

Here's a guide to the often-overlooked business interruption insurance which 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 the likes of fires, floods and storms can cause, business interruption protects the income that you would have generated had the claim event not happened.

What does business interruption insurance cover?

Business interruption insurance can be complicated, and policies can consist of 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.

But, typically, a business interruption insurance policy will cover:

  • Loss of profits your profits are based on franchise information such as 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 (if applicable).
  • Additional expenses 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 have to close until your franchise can operate normally and reopen. If you choose not to trade at any point outside of this period, youll be responsible for any financial loss thats incurred.

Who needs business interruption insurance?

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

If youre 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 is doubtful.

But if youre uncertain, remember to consult an insurance professional. The most successful franchises dont leave anything to chance because theyre aware of the consequences of getting it wrong. Just because business interruption insurance isnt 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.

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. For this reason, 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 thats 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.

Some business interruption policies may include cover for virus attacks, hackers or other cyber risks which cause business systems to fail, but you may need specialist insurance for such events.

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 youd 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 your business is the victim of flood, fire or storm damage.

And its not a case of it will never happen to me. According to research by Direct Line, over 550,000 of SMEs in the UK had to cease trading between 2014 and 2016 temporarily. The same research discovered that the average cost of keeping a small business up and running for just two weeks is £8,755. Compare this to the three-month period which is the average amount of time that companies have to suspend trading following property or equipment damage, and you can see where the problem lies.

What other insurance does my franchise need?

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

  • Employers liability insurance by law youll 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, youll need the appropriate insurance in place as you would for your personal car.

 

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