An Introduction to Business Interruption Insurance from MRIB


Hi, my name’s Edward Finch and i’m the Managing Director of MRIB. Today we’re going to go through Business Interruption insurance, and the importance of making sure that you’ve got the right
calculation. But what is Business Interruption?
Following a claim from fire or flood, often companies will see their turnover
reduce, and their operating expenses go up. We and your insurers will look to compensate you, so you’re put back in the same position as if the event
hadn’t occurred. Business Interruption, or BI, is one of the most important insurances to purchase for a company, but over 70% of the UK companies purchase this incorrectly. Because of this common error, a huge number of companies, up to 70% are significantly underinsured. A simple reason for this is that insurance
BI is not the same as accountancy gross profit. But what does underinsurance mean? When you’re underinsured, following a claim insurers will apply
average. So if average applies to your claim,
insurers will penalise you and you will be responsible for a
significant percentage of the claim. So in summary, if you have the wrong
Business Interruption formula or calculation, you will have to fund from
your own sources, the claim that the insurers
will not contribute to. Let’s look at the impact of underinsurance.
The formula used to calculate this is declared value divided by the correct
value times the loss. So if we look at a real example, a company insured its Business
Interruption for £1.5 million. The actual correct value was £3.25
million. They only sustained a loss of £275,000 but the insurers applied average, so the
total payout was only £126,000 giving them a shortfall of £149,000 How can we stop this happening to you? Let’s look at the two different formulas
in gross profit. First of all the accountancy, this is quite
simple. It’s turnover less cost of sales. The insurance formula is turnover plus closing stock, minus cost of purchases, opening stock, cost of packaging and freight, and bad
debts. What’s really important to remember in the
insurance gross profit calculator in respect to purchases, this should not
include your direct wages as you want that cost included in any
settlement. So let’s look at a real life example of a
company, and how they insured their gross profit before they came to MRIB. They specialised in blending of foods, and using the accountancy gross profit, which is what they were using, they had a gross profit or Business Interruption sum insured of £3.59 million. The actual correct
insurance gross profit was just over £7 million. Following this through, if they had maintained the incorrect calculation and then had a claim of £486,000 they would have only received £246,000 leaving them underinsured or out of
pocket by £240,000 when turnover is going down and costs
are going up. To increase the gross profit on this
company from £3.59 million to just over £7 million, cost
literally a few thousand pounds. The consequences of getting it wrong
could cost you hundreds of thousands, if not millions, and worst case, but a very realistic
worst case is you see your company fold because it
is unable to sustain the losses on its own. At MRIB we’re experts in insurance and
really understand Business Interruption for your business. If you’d like to talk to us further on Business Interruption, or any other insurance related matters, please do get in contact with us, either by email, which is now on the screen, or by phone number. Thanks very much for listening and I do hope you’ve enjoyed this.

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