24/10/2022
Howden UK Corporate advise manufacturers on how to avoid the underinsurance pitfalls.
Business interruption (BI) insurance can provide a lifeline for manufacturers in the event of a disaster, helping your business recover any financial losses.
If a fire, storm or flooding causes damage to your premises or equipment, then most BI policies will cover you for the business interruption that inevitably follows.
But it’s important to get it right: whether or not your business manages to recover from a major loss could hinge on the adequacy of your BI cover.
It can be easy to inadvertently end up underinsured, meaning your insurance isn’t sufficient to cover your needs. In this case, your insurer may apply averaging, meaning the amount that you’re paid out is reduced proportionately.
This can occur if sums insured aren’t set at the correct level. This can be in part due to confusion over gross profits, which forms the basis of many BI policies; an accountant’s definition of gross profit isn’t the same as that used by insurers. In 2017, a survey by the Chartered Institute of Loss Adjusters found that the gross profit declaration was too low in 44% of BI policies.
As well as ensuring you have the correct sum insured, it’s also important to review this figure at least annually to ensure it remains in line with changes in your business, especially if you are expanding rapidly.
Setting the right Maximum Indemnity Period
Another common cause of underinsurance is when businesses choose an insufficient maximum indemnity period (MIP) for their BI policy. The MIP is the period of time during which you can make a claim under your policy; after this time, any further loss of profit is no longer insured and the claim payments will stop, even if the sum insured hasn’t been fully spent.
So, setting a sufficient MIP is vital. The time period should be long enough to enable your business to bounce back to the same level it would have been if there had been no loss. That includes any expected growth during this time.
When deciding on the length of the MIP, it’s important to reflect on a wide range of potential circumstances and plan for the worst. For example:
- If you had to demolish and rebuild your premises, you’d need to gain planning approval, which can be 1complicated and time-consuming.
- The time taken for rebuilding property has been exacerbated recently by raw material and labour shortages.
- If you needed to replace specialist equipment and machinery, especially if it was shipped from Europe or further afield, then you can expect delays.
- Staff retention may be impacted: you could lose key staff and, given the current acute worker shortages facing manufacturers, it may take a lot longer than normal to replace or retrain them.
All told, its important to consider the knock-on effects to your business of a long interruption to trading. Returning to your previous level of income could take time, even after you’ve replaced any machinery and had property rebuilt.
While every manufacturer’s circumstances are different, generally our advice is that insuring your financial health with an MIP of less than 24 months is not long enough. It could be wise to consider 36 months. Otherwise you increase the risk of underinsurance after a major loss.
It may be worth going one step further and adding additional increased cost of workings to your BI cover. In the event of a major loss, this would enable you to claim for additional expenses, such as contracting work out to continue to supply customers.
Help is at hand
Howden have been Make UK’s insurance partner for 15 years. We want to help our manufacturing clients in ensuring they have adequate BI cover in place, and are correctly insured as a result.
We offer all our clients, regardless of the size of your business, an advised sale, meaning that we use our manufacturing expertise to advise you on the best insurance for your needs, and we support you every step of the way when taking out insurance and making claims.
To find out more about how we can help, contact the specialist Howden team. Call 01234 230275 or email: [email protected]