How Business Interruption carries your charity during unavoidable downtime
If you're running your charity from commercial premises, or if hiring out your building is how you derive your income, hopefully your insurance provider has recommended Business Interruption cover (BI) to protect you from certain costs and losses that are outside of your control.
While the building and its contents may be adequately covered for replacement or repair, BI offers a robust layer of protection to your finances for a very specific purpose and is often overlooked.
BI in a nutshell
Business Interruption cover protects your organisation against loss of income following material damage to your buildings – whether you own them or not. It also provides a reserve fund for some increased costs which you may incur if you're unable to access your premises for a time.
How does it work in practice?
The first thing to say is that each charity’s requirements will be different so it’s important to seek professional advice at the outset. However, here are a few sample scenarios you might identify with...
EXAMPLE - a charity office
Imagine you suffer a fire or flood at your premises that results in damage to your building and some IT equipment. The repair or replacement of those should be covered within your existing insurance provision under the relevant sections.
However, what won’t be covered is the period of downtime during which you can’t operate.
You’d probably need to find a temporary alternative location from which to work, as soon as possible, with or without an increase in rent and you’d want to publicise the relocation. Could the charity’s limited funds bear all these costs?
If not, or anyway, arranging BI cover before the event would certainly protect charity funds from these relocation costs, the rental difference and the publicity costs.
EXAMPLE - a city centre meeting space
This example is a real-life situation that occurred for a church in Dorset and it could just as easily arise for a community centre, village hall or other premises used to generate income.
Now, on the face of it, you wouldn’t expect a church to have a Business Interruption exposure but on looking closely at their circumstances we agreed that cover was appropriate.
They have a new building which took 3 years to build and it’s theirs for a peppercorn rent. So, if there was ever major damage at the premises, it could perceivably take another 3 years to get back up and running.
We chatted BI through when we reviewed their cover but they initially decided against it.
However, having gone away and looked at their income and potential rental costs they quickly came back to us and showed us the figures, requesting that we add BI in.
At an estimated cost of £100,000 pa to rent an alternative space to house their large church, offices and meetings plus £80,000 pa in lost hire revenue from conferencing, they'd worked out that a 3-year loss could be in the region of £540,000.
Not just for major catastrophes
Of course the benefits are easy to see on the cases where the potential losses are huge but BI also covers smaller-scale incidents.
EXAMPLE - a charity shop
Perhaps a gas leak in a neighbouring property results in a denial of access to your charity shop for a day as surrounding properties are evacuated for safety reasons. How would you recoup the income lost even during this short period of time?
EXAMPLE - a local foodbank
You're operating the local foodbank and you're forced to purchase stock that is usually donated so you can meet customer demand while your storage facility is temporarily inaccessible. Your existing stock isn't damaged so it won't be replaced under any other insurance. However, you'll have this increased cost of working during the period of disruption.
Business Interruption cover doesn’t stop there. During a prolonged period of enforced closure, you might not have any revenue coming in but you would want to continue paying any staff wages so they're not left out of pocket or tempted to leave in search of other work. BI cover steps in to help here too by covering salary payments.
Smaller charities may need to divert personnel away from fundraising/collecting activities to focus on reinstatement and so there could be a potential claim for loss of revenue or increased acquisition costs as an indirect result of the damage.
If all or part of your funding comes as a result of fulfilling a local authority tender or any other paid-for services you’d be wise to assess how a period of inactivity would affect the contract – both now and at renewal. BI cover could mean the difference between success or failure and give awarders the confidence to choose you over another provider who doesn’t have the contingency in place.
At the end of the day it's for you to decide on the value of having the protection but at least now you're aware that Business Interruption exists and how it could help you through an otherwise stressful time.
To talk about any aspect of insurance for your charity, community group, voluntary organisation, church or faith group please call UK Charity Insurance on 01424 205063 or provide brief contact details online.
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