Checklist Description
This checklist describes the basics of business continuity insurance.
Definition
This type of insurance provides a valuable safety net for organizations in the event of a serious disruption and is not a substitute for business continuity planning. It is not sold separately, but either as part of a general package or with buildings insurance.
If an event such as a fire damages a company’s premises and prevents it from operating, business continuity insurance covers the profits that would have been earned if the disaster had not happened. The amount of compensation is determined by an examination of the company’s business records.
Policies also generally cover operating expenses, such as power bills, which continue even when normal business activities come to a halt. Most policies, however, have a two-day waiting period before claims are covered.
Premiums are determined both by policy limits and the type of business covered. For instance, a restaurant would probably pay more than an office-based business. That is because the risk of a restaurant catching fire is probably greater than an office, and it would be harder to transfer the business to alternative premises.
It is very important that a business continuity or interruption policy is absolutely watertight, even if that takes a great deal of time and effort. If holes are found after a disaster, it could be too late.
Advantages
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Insurance cover is a useful, even vital, adjunct to a business continuity plan.
Disadvantages
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Insurance can cover lost income following a disaster such as a fire, but it won’t restore a company’s competitive position in the marketplace if it ceases trading for an extended period.
Action Checklist
1. Ensure that insurance is coordinated with the business continuity plan
In particular, indemnity periods should cover the full time it willtake the organization to recover from a disaster, including:
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Time for demolition, redesign, and rebuilding;
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How long it will take to replace specialist machinery;
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Rehiring if staff have been laid off;
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Also, if there are multiple sites, decide whether the same indemnity period is applicable to all.
2. Identify all sources of income and potential loss
Identify what income would be lost as the result of a shutdown and other costs or losses that might result.
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Most forms of income can be covered; these vary according to type of business and can be a combination of revenue, fees, or rental.
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Make sure penalty payments are included if a major incident could affect the company’s ability to complete a project.
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Some income will not be covered, such as interest on investments or sales of assets.
3. List all business activities
In listing business activities you should:
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Be sure to add acquisitions, new divisions, and new ventures;
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Ensure that long-term projects are covered even if they have not yet produced income;
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Consider including key suppliers if damage to their premises could have serious repercussions on your business;
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Ensure that power suppliers are included, and check to see when coverage commences. There is a week’s “deductible” in many policies.
4. Review the amount insured regularly
It may be useful to consider the following points.
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Many large organizations with multiple profit centers include intergroup sales that can inflate the premium through double counting.
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Make sure the projected figures for lost earnings are accurate for the whole insured period, which may be two or more years.
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Consider including a premium adjustment clause to take account of actual rather than projected earnings at the end of the year.
5. Include other potential costs and savings
Include both the increased payroll costs and savings that would follow a disaster:
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Estimate how many seasonal and other staff could be laid off;
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Make provision for redundancy payments if necessary;
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List the key staff who would need to be kept on to enable the company to resume full working.
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