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Business interruption insurance "a necessity not a luxury"

Aviva Risk Management Solutions (ARMS) reveals that despite the trend to do so in past recessions, it has not found that companies have automatically cut or reduced their business interruption insurance during the recent economic downturn.

Business interruption risk adviser at ARMS Alan Trueman explains why keeping such insurance in place, and maintaining the correct maximum indemnity period (MIP), can prove financially beneficial to firms.

Business interruption insurance helps to financially protect companies in the event of a serious incident. If an insured incident occurs, companies face a number of risks which business interruption insurance can help them overcome.

Whilst Material Damage cover provides the money required to repair and rebuild premises, re-order and replace stock, Business Interruption cover allows businesses the time to recover their customer base and also pay for any necessary increased costs incurred whilst doing this.

Indeed, Mr Trueman says that many firms forget that replacing the material assets is only part of the solution to fully recovering their business.

If a firm cannot provide its regular service and products to customers, then they may go elsewhere and it will take time and money to win them back from competitors.

In order to ensure that business interruption insurance provides the maximum protection from unexpected events, Mr Trueman states that MIPs must be sufficient enough or firms risk being underinsured.

The MIP on a Business Interruption policy is the maximum period for which a business is insured and should be chosen carefully to ensure it will allow sufficient time to rebuild premises, replenish their stock and rebuild their customer base, after which they will have to fund the cost of the recovery themselves.

For example, MIPs of 12 months, have on numerous occasions been found not to be long enough to allow businesses to fully recover, Mr Trueman says. Common MIP periods are 12, 18, 24 and 36 months and he advises that MIP periods of more than 12 months should really be the norm.

"Previous recessions have seen firms cancel entirely or reduce the scope of their business interruption cover or lower their MIP. Although there is no evidence that this has been widespread during this recession, firms should still remember that business interruption insurance is a necessity not a luxury, "Mr Trueman states.

He goes on to thank the insurance brokers who work with Aviva-insured customers, saying: "We would like to thank them for their efforts and the advice they have given when explaining to organisations the importance of having correctly arranged business interruption insurance."

Extensions can also bolster business interruption insurance protection

While having a standard business interruption insurance policy with a long enough MIP for recovery is advised, there are also a number of extensions which firms can purchase.

The Prevention of Access extension provides financial assistance for companies whose customers cannot get to their premises because of an incident. In the example of the recent floods in Cumbria, a collapsed bridge could have meant many firms were inaccessible, not only impacting upon customers' ability to get there but also the ability of suppliers to deliver and goods to be placed into the market.

Mr Trueman also explains the importance of Loss of Attraction cover, which is where there may be no damage to a business but damage to other local amenities which could mean customers are put off from visiting an area, reducing passing and regular trade.

Such business interruption insurance extensions can therefore provide protection if a firm has managed to avoid being impacted upon by an incident, such as flooding, but the surrounding area, suppliers and customers have been.

The November flooding in Cumbria has resulted in the cost of damage rising to £206 million, the Association of British Insurers (ABI) reveals.

Of this cost, 60 per cent relates to business damage, which could highlight the importance of having robust enough business interruption insurance with an appropriate MIP in place.

Interim payments made by insurers to firms and homeowners have ranged from £250 to £400,000 - a figure which may make it clear how expensive an incident such as flooding can be if insurance is not in place.

Nick Starling, the ABI's director of general insurance and health, says: "Insurers are playing a critical role in getting Cumbria back on its feet following the devastating flooding. It can take months for badly flood-damaged properties to fully dry out, which is why insurers are paying for temporary accommodation or alternative business premises for those most badly affected."

He added that having insurance in place is important so that businesses can continue trading while local infrastructure, including bridges, are repaired.

ARMS offers guidance to businesses about flood risk

ARMS provides hardfacts guidance to businesses about how to deal with the risk of flooding. Guidance about how to minimise the risk of flooding can be found here.

Included within the guidance are the questions that companies should ask when assessing the risk, such as the proximity of a firm to watercourses and surface water drainage systems and if the premises has a history of flooding.

ARMS also offers advice on how to repair a business once flood waters have hit, information about which can be found here.

This advice was drawn up in conjunction with the ABI and the National Flood Forum and includes information about the two main approaches businesses can take - flood resilience and flood resistance.

Further information can be found by contacting ARMS on 0500 55 99 77.ADNFCR-2134-ID-19579205-ADNFCR