The Difference Between Business Interruption and Business Failure for a Manufacturing Firm
The lack of adequate business interruption insurance can lead to the demise of any business, especially those in the manufacturing and production industry. Obtaining business interruption coverage as part of your company’s property/casualty or comprehensive package policy is extremely important in the event that your business is interrupted or inoperable. Unfortunately, many manufacturing business interruption policies do not adequately cover the many risks this industry face every day, resulting in the inability to replace business income during the interruption or inoperable period.
There are several factors to consider when reviewing your manufacturing business interruption coverage:
- Coverage must be sufficient enough to cover the total loss of your company.
- The policy must provide for payroll so your trained workforce stays at the company through the restoration period.
- There should be an option for an extended period of restoration to provide income until ordinary operations are fully restored.
- The policy should cover dependent properties. For example, if a key supplier suffers a direct property loss and cannot supply your company with the correct products or materials, then you would be covered for your loss of income.
- Off-premises utility interruption needs to be provided in the event the local power company is unable to provide service to one or all of your operating facilities due to weather conditions or other unexpected circumstances.
Additionally, it is important to note the difference between items covered and not covered by interruption insurance. Expenses that are typically covered by business interruption insurance include lost revenue, employee wages, rent (which is still due when a building is unusable), temporary relocation (if available), loan payments and taxes. Expenses that are typically not covered by business interruption insurance include utilities, undocumented income and closure from power lines being down (since this is a common occurrence and is difficult to insure).
Business interruption can be a complex area for manufacturers to insure. It is best to work with a trusted broker to review the specific details of your policy, your company’s overall operations procedures and risk environment to ensure you are adequately covered.
Here are four common issues to look out for when considering business interruption insurance:
1. The policy only pays out for events covered by the company’s property insurance plan.
For example, if a flood occurs and impacts your business and it needs to close, but floods are not covered by your property insurance plan, then there will be no payment through a business interruption insurance plan. So be sure to review the policies and understand what type of events are covered.
2. There is usually a waiting period before benefits kick in.
Do not be surprised if it takes between two to three days before benefits apply and your business is covered.
3. There must be proof of financial damage.
Businesses, especially those growing quickly, must keep track of their finances in the event there is a business interruption case, so that the insurer has a point of reference.
4. Every policy is different.
Be sure to review your business interruption policy because every insurer has different coverage standards.
Without business interruption coverage, your manufacturing or production business could lose everything. Ensuring not only that you have a policy, but that all of your unique risks factors are covered can be the difference between business interruption and business failure.
Contact an RCM&D advisor to learn more about business interruption insurance to prepare your company for any future disasters.