What is business interruption insurance?

The short version of the definition of business interruption insurance can be found in Dictionary. There it says that the insurance secures the entrepreneur's profit and covers his costs - even during a business interruption. In order to be able to decide whether and when this form of insurance is worthwhile or suitable, more answers to important questions are needed, which this article has in store.

This insurance is a loss of earnings insurance

With this categorization it becomes clear that the Business interruption insurance is a special form of damage insurance that is useful to an entrepreneur when operational efficiency is limited and the entrepreneur has to forego income as a result. The object insured in the policy is the company, but not the production factors, but the Redeeming power of the company.

The decisive factor as to whether or not the business interruption insurance pays for a damage is the damage itself or to what extent it is covered in the policy. Business interruption insurance typically comes into play if the company was temporarily ineffective, for example because the public supply of water, heating or electricity was cut. Both the reasons for the downtime and the insured period are documented as liability in the insurance contract. Reasons that can be found in the process of production, procurement and sales are also conceivable.

Business interruption insurance covers internal and external risks

Business interruption insurance, for example, covers the risk of internal and external influences disrupting operations and resulting in lower revenues. The list of different variants of this insurance is long, which is why every company has to check for itself which insurance variant is the most suitable. The basic insurance is called business interruption insurance. Secure more specific variants

  • the fire,
  • technical reasons,
  • the machine failure,
  • the spread of animal diseases,
  • and the transport.

There are also niche areas, such as film cancellation insurance and event cancellation insurance, which large event agencies take out to protect against the risk that the booked artist will suddenly not be on the stage and a mountain of costs will remain with the organizer. A landlord, on the other hand, could take out rental loss insurance to compensate for the consequences of a loss of rent.

Most insurance agencies deal with freak weather conditions such as hail and storm, flood and avalanche, snow loads and Landslides, insured, but also costs that arise due to water extinguishing systems (as a result of a fire), vandalism, burglary and leaking water pipes. Even internal downtimes that result in Strikes and unrest can be covered by business interruption insurance.

Figure 2: A strike could also reduce the company's earning power and would be a case for business interruption insurance.

This will be charged in the event of damage

In the event of damage, the lost contribution margin is the most important factor. In order to calculate the so-called loss of sales, the actual sales are compared with the Target sales to be adjusted taking into account growth trends or regional fluctuations in the industry. The lost revenue is the starting point, which is reduced by the cost of materials, energy costs and other variable costs. Business interruption insurance does not cover these variable cost factors. The income generated because internal or external influences have disrupted the normal flow of operations also have a reducing effect. The business interruption insurance then bears two cost packages: the fixed costs and the loss of profit.

In order to benefit from business interruption insurance in an emergency, three insurance factors are decisive. In addition, they are adjusting screws that make it possible to regulate the level of the insurance premium that is to be paid by the entrepreneur.

The sum insured - This is referred to in the insurance as the sum insured and is the maximum amount in the event of a claim. The amounts insured for personal injury and property damage are documented individually. A guide is the lower limit of three million euros.

With regard to costs, the following applies here: the lower the sum insured, the lower the costs that the entrepreneur has to shell out for the insurance. A needs analysis in advance should clarify how high the coverage should be.

The deductible - This imputed quantity shows how much of the damage the insured person bears himself. Many other insurance companies also have this structure. The following applies: If the total damage is below the agreed deductible, the entrepreneur alone has to pay for the costs.

With regard to the costs, the following applies here: The deductible can reduce the cost of the insurance, but experts advise a realistic amount. If the deductible in the event of a claim could not be borne independently, there is no second insurance for this cost item.

the period - Traditionally, commercial insurance is taken out for a period of between one and three years. Longer contract terms are certainly also possible, but these models suffer from flexibility for the policyholder.

With regard to costs, the following applies here: a longer term is of course a godsend for the insurer. Accordingly, there can be attractive bonuses for those who opt for a longer insurance term.

Business interruption insurance is also often referred to as loss of earnings insurance. With this insurance alternative, however, the number of employees, the amount of sales, the location of the company and salaries including any premiums play a role.

Figure 2: pixabay.com © WFlore (CC0 public domain)