Ensure business interruption cover is sufficient

A leading European business interruption specialist has warned that many companies may not have sufficient insurance cover. In particular, greater care must be taken in calculating the specific costs the organisation could face if they – or their suppliers – are unable to trade.

Speaking at the biennial forum of the Federation of European Risk Management Associations, Staffan Ljung of P&C Insurance advised that risk managers should perform the same calculation when assessing risk as is carried out by insurance underwriters. He warned that the most crucial decision was the length of the indemnity period included in the coverage, while the structure of coverage extensions for supplier and customer risks was also a vital consideration.

According to a report on Business Insurance.com, he advised delegates to “map out your risk and then start thinking about what indemnity period to choose…A common indemnity period is six months; but if you choose such a short period, you have to ensure you can retool in such a short time.”

He stated that longer indemnity periods are usually selected by companies with long delivery times or tailor-made machinery. These also increase the chance of insurers paying for extra business expenses which could shorten the length of time a policyholder claims for lost profits.

Policyholders should also look at how they measure their exposure to problems suffered by suppliers or customers, and to look at specific contractual arrangements. For example, “a company may rely on another firm for supplies, but its contract is with the distribution arm of that company, which many not have suffered the property loss.”

He advises companies to use the same risk management processes to mitigate the risks of shutdowns at suppliers as they do for their own business.