What has Irma taught us about business interruption insurance?

What has Irma taught us about business interruption insurance?

A year ago hurricane Irma raged across Sint Maarten. It caused a lot of damage, also for the entrepreneurs. A number of companies closed while others were able to rebuild with help from their insurance payment. Irma taught entrepreneurs some lessons when it comes to interruption insurance. This is insurance that compensates companies that have not been able to function properly or for some time for damages suffered due to covered circumstances.

It is important to know the exact extent of the damage in order to be able to file a damage report quickly. For the company to move on, it must be able to enter into a discussion with the experts and insurers in order to receive a pay-out as soon as possible. Drawing from our experience with the submission and settlement of insurance claims, we explain here below the main points of attention for dealing with a business interruption insurance policy.

Which type of insurance? 
Entrepreneurs generally know whether they have business interruption insurance, but after Irma many were surprised to learn that there are different types of insurance.

In most cases, insurers offer three types of insurance.Insurance can be taken out with various insurers. Most types of insurance are based on the company’s turnover or gross margin, net profit plus fixed costs or fixed costs alone.

Compensation for the loss due to business interruption is calculated on the basis of the sum of the turnover plus the gross margin, net profit and/or fixed costs.Gross margin means turnover less cost of sales. The fixed costs are the costs that keep accumulating even after a calamity. Think of salaries of permanent employees, rent, insurance premiums, interest and subscriptions.

For the entrepreneur, it is important to know which costs can be considered fixed and which not. Variable costs are not covered in any scenario. Examples of variable costs are representation costs, selling expenses, entertainment expenses and employee salaries on an hourly basis (part-time).
It is also important to know how many months of business interruption are insured and how high the deductible is. Finally, also identify which calamities are and are not insured.

Calculate the insured value each year
The calculation of the damage in case of calamities can be tricky. Nevertheless, it is important to make a good estimate of the insured value every year. This keeps the premium amount correct and also reduces the risk of being insured too high therefore making the premium too high. A sum insured too low also entails risks. If the damage is higher than the insured sum, there is under-insurance. In the case of a submitted claim, the insurance benefit will be reduced because the amount was too low and therefore the premium paid was also too low .

Good administration is essential
It sounds all too logical for an accountancy firm to emphasize the importance of an up-to-date administration that can be consulted quickly after a calamity and that can generate accurate information for the insurers to be able to quickly file a claim. Think of the possibilities that the cloud offers and applications that can link scans of administrative documents to the administration.
Furthermore, a clear division of the fixed costs and variable costs in the administration is essential. This helps to quickly provide a summary from the administration what the amount of the damages is. It also helps if the annual accounts are completed on time, so that they can serve as an additional reference for the amount of the damage.

A good broker
A year after a hurricane like Irma, there is still a lot to do for entrepreneurs. A good relationship with a knowledgeable insurance broker who is willing to help ensures some peace of mind and faster pay-out of insured damages. It is also good to discuss the exact details of the insurance with the brokers, claim handling after Irma has taught us that the way the claims are calculated vary between insurers. Nevertheless, it often takes months before the benefit is received; an entrepreneur needs to be prepared for this.

Do not give up too quickly
It may sound a bit redundant, but it is good to have clear discussions about the level of damage. The discussion usually is centered on which elements form part of the gross margin and which costs are fixed or variable. Also, costs that are variable at first sight may partly consist of fixed elements. A good example is telephone costs. These are partly variable based on the calling behavior and partly consist of a fixed component (subscription, internet connection).

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