Business interruption indemnity periods: how long is long enough?
21 July, 2021
How long is long enough? It’s a question many brokers ask themselves when advising their clients on the appropriate length of time for an indemnity period in a business interruption insurance policy.
IUA underwriter Christopher Connolly says that while many brokers consider 12 months something of an industry standard, depending on the nature of the business being insured, a 12 month indemnity period can often be insufficient.
“The indemnity period does not just need to cover getting a business back to trading again, it’s about making sure the business gets back to the same trading conditions and cash flow it had before the claim, and in many cases 12 months just doesn’t cut it,” he says.
Hard market conditions mean that indemnity periods are one of the areas clients are looking at cutting back on to manage their business interruption insurance costs, but Mr Connolly warns that doing this could leave businesses exposed.
Things to consider when setting indemnity periods
Mr Connolly says there are many factors to consider when trying to establish the appropriate length of indemnity.
An initial question brokers should look to answer is whether their client can trade from another premises or whether they need to operate from a specific location.
If the business is able to temporarily or permanently relocate, some of the factors that could impact the time the business takes to recover include:
- The availability of alternative premises.
- The time involved in relocation, set up and having services connected.
- The availability and lead times of any specialised equipment or stock the business requires.
- The amount of time until the business can relocate to its original premises.
- The time it may take to rebuild its customer base.
For clients who own the building they trade from, or need to operate from specialised premises, additional considerations when assessing the appropriateness of indemnity periods include the time required for the following:
- The property damage insurance claim to be accepted and processed.
- The clean up and removal of debris.
- The development of reconstruction plans.
- The Council planning approvals process.
- The tendering of building works.
- Finding available contractors.
- The building works to be completed.
The IUA difference
Unlike many of its competitors, IUA’s business interruption insurance policy doesn’t offer a standard indemnity period, instead Mr Connolly says brokers can choose from 13 weeks to 24 months, or even up to 36 months in some cases.
For added peace of mind, IUA’s policies also come with an extended indemnity periodon some policies.
Mr Connolly explains that this applies if the insurable gross profit limit in an IUA business interruption policy hasn’t been exhausted during the period of time the business is indemnified for. In such cases, IUA will extend the indemnity period by up to double the initial indemnity period.
“So for a business with a 12 month indemnity period, if, by the end of 12 months, the insured hasn’t used up the insured gross profit limit and their business hasn’t recovered to the point it was at before the claim, we will extend the indemnity period by an additional 12 months,” he explains.
“That extension is extra peace of mind, just in case things go awry and a business needs an extra bit of time to get back on its feet.”
Catastrophes and natural disasters
Another factor for brokers to consider is that if business interruption results from a natural disaster or catastrophe, the recovery time can be prolonged due to stretched resources across claims assessment, insurance processing, clean up and rebuilding.
While brokers with clients in known high-risk disaster areas should take this into account when considering their clients’ indemnity periods, Mr Connolly says that for businesses in other areas, IUA’s extended indemnity period can be particularly helpful in these circumstances.
Find out more
For more information about IUA’s specialist business interruption insurance cover please visit our website or call us on 02 9307 6655