While it’s not something anyone wants to think about, giving due consideration to how your business would cope in a crisis is sound business advice.
More specifically, thinking about how your business would cope if a major asset – like your premises or vital machinery – were no longer available is time well spent. Even the best businesses run into trouble, yet all too often we hear the phrase ‘but we wouldn’t lose everything’. This is simply untrue. Understanding how long it would take for your business to get back on its feet following a total loss is your key to insurance contracts that are truly fit for purpose.
Maximum indemnity period and total losses
This phrase sounds like a bad Steven Seagal movie, but it’s actually a vital detail in your insurance contract. One that can actually make or break your business following a disaster.
The industry definition of indemnity period is…
The period beginning with the occurrence of an incident and ending not later than the maximum indemnity period thereafter during which the results of the business shall be affected in consequence thereof.
In non-technical language, the maximum indemnity period is the length of time for which benefits are payable under an insurance policy.
So if your business suffers a total loss that takes you six months to recover from, and you only have three months left on your policy, you could find yourself out of pocket. Our business interruption video explains how this works.
What issues can affect your recovery period?
Sometimes even businesses need time to heal. Here are some examples of often-overlooked details that can put a stopper on your road to recovery.
- You don’t own your building and occupy as a tenant. So you don’t have control over building reinstatement. The lease will normally require the property owner to reinstate in a reasonable period but there may be cover or under-insurance issues that increase the period of reinstatement or prevent payment being made at all.
- You occupy a listed building. In this instance conservation officers will get involved which may extend the period of reinstatement.
- Your building is in a restricted area, such as a busy high street, where limited access and/or restrictions on working hours could cause an extended reinstatement period.
- You’re not able to work from a temporary facility. You might have large items of machinery that need specific foundations or facilities installed for the machinery to operate such as three phase supplies or extraction systems.
- Your operation is subject to planning restrictions requiring a change of use to be applied for in relation to any temporary premises.
- Machinery and plant can only be sourced from abroad and replacements are therefore subject to long lead times and travel. The same scenario might also be applied to stock and goods.
- Stock is only available on a seasonal basis and the loss occurs at a time when the stock levels are low and cannot be easily replenished.
- You operate in a highly competitive market where your customers have a ready alternative supplier of product that they can switch to while you’re out of action.
- You are sole supplier to certain key customers and even though you may continue to supply that customer following a loss, they might decide to dual source going forward in order to protect their interests.
- Your skilled employees leave thinking that your business is vulnerable following the incident. This would have a knock on effect in terms of customer confidence and the ability to resume production when back up and running.
This isn’t an exhaustive list of examples, but it’s hopefully enough to encourage you to think about your maximum indemnity periods when discussing your insurance with your broker.