Business interruption insurance

Thursday, April 21, 2022

Business interruption insurance

Business interruption insurance

Why business interruption insurance? Compensation for the expenses incurred in the event of property damage to replace destroyed and damaged items and the associated costs for cleaning up the damage site and disposing of the rubble is not enough. The resulting business interruption damage, caused by the continuation of the fixed operating costs and the total or partial loss of sales revenue, is often greater than the property damage.

After the property's damage, fixed costs must not be reduced by the immediate dismissal of employees due to an extraordinary event. Based on a judgment of the Federal Labor Court in 1971, a company may not fire employees after fire damage because it has the option of taking out business interruption insurance to prepare this case. The judgment only refers to fire damage but should, in doubt, apply to other insurable dangers analogously.

It would also be short-sighted to fire employees after a damage event and reinstate them after the business has been rebuilt. The more qualified and capable employees could very soon make their workforce and their know-how available to competitors. After a few months, the part of the staff that is still available on the job market is certainly the more problematic part of the former workforce.

Business interruption insurance's economic importance is not to let market participants permanently disappear from the market due to incidental events. It, therefore, has a competitive function.

In principle, all risks insurable in property insurance can also be covered in business interruption insurance to be insured. If property damage is insured, the resulting business interruption is also ensured. Conversely, the dangers and damage excluded in the case of material coverage are also not insured in the business interruption insurance.

Every company should clarify how sensible it is to ensure individual risks against business interruption damage with their risk management or their insurance intermediary. In general, it can be said that insurable dangers, which can lead to damage threatening the existence of the company, can also result in major business interruption damage.

Also, a relatively small amount of damage to a bottleneck facility that has to go through all or almost all manufactured products can cause major business interruption damage.

Expert tip: Always cover the risk of substance and business interruption against the same insurer against a hazard. Decisions to be made after a damage event can increase property damage and reduce business interruption damage and vice versa, such as the faster but more expensive replacement of a specific machine.

Suppose property and business interruption losses are with different insurers. In that case, property insurance does not pay the additional costs of the machine. In contrast, the business interruption insurance does not want to take responsibility for the extended business interruption associated with the regular procurement of the machine. If both risks are with an insurer, the decision is made pragmatically, depending on what is going on at least possible total damage.

Three types of business interruption insurance are suitable for different company sizes:

  • The small business interruption insurance (KBU), which is suitable for shops and small craft businesses
  • The medium business interruption insurance (MBU), which fits the commercial middle class and
  • The large business interruption insurance (GBU) is used for all larger companies.
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