All too often, it seems that the good companies die young because of a crucial weakness, a weakness that is exploited by opponents as they fight for survival on the corporate battlefield.

Business risks can be easily identified by those in the know. More often than not, however, business interruption represents most companies’ glaring Achilles’ heel. Most businesses insure assets like factories, offices, equipment and stocks against hazards like fire, explosions, earthquakes, storms, floods and other so-called extraneous perils. So why don’t more businesses think about loss of profits or potential interruptions?

One reason is that this is a class of insurance that many insurance advisers find hard to explain. Another reason is that many businesses are only required by mortgagee banks to insure their physical assets. These banks are concerned about protecting their loans and no more than that.

What are the odds?
A common reason cited by business owners for not wishing to take out business interruption or loss-of-profits insurance is that it is unlikely to happen, but the risks being insured against are essentially the fire and other extraneous perils likely to affect physical assets, so this view is not logical. It reflects the desire to save insurance premiums wherever possible, but this decision can prove disastrous.

Business interruption or loss-of-profit insurance provides payment for the financial losses that result from physical loss or damage to insured property caused by an insured peril, such as a fire or an explosion.

Such insurance could cover the hampering of a manufacturer’s ability to make their product, for example, or the destruction of a retailer or wholesaler’s merchandise or building, which would clearly make it difficult to trade. A professional practice could be affected by the destruction of its office and records, while damage to (or the destruction of) a rental building would obviously affect a company’s rental income.

Besides the normal ‘physical’ risks like fire and other extraneous perils, business interruption insurance can also be extended to cover causes of business interruption such as the failure of public supplies from power-generation authorities, or denial of access due to a disaster at neighbouring facilities.

What are the effects?
If we assume that the cause of business interruption was a fire, the typical effects might include a drop in cash flow, especially while maintaining the business in the face of the immediate loss of physical assets. Salaries and wage payments may need to be continued without the normal income derived from operations, or there could be redundancy or retrenchment payments to be made.

Without business interruption insurance, a vibrant and profitable business can bite the dust when the arrow of misfortune hits. In most cases, the losses resulting from business interruption exceed the loss of the physical assets, especially where plants and equipment are involved.

THIS ARTICLE IS REPRODUCED COURTESY OF SMART INVESTOR MAGAZINE