Some unfortunate situations are out of a business’s control and may force a business to shut down temporally. These situations are the worst for the company as they follow with a significant financial loss. This case study will explain how business interruption insurance saved our client from a month plus of financial loss. Business interruption insurance comes as an extension to property all-risk insurance. Business interruption insurance covers the business’s financial loss during the temporary shutdown. The purpose of the insurance is to put the business back in the same position it was in before the tragic event occurred.
Background of Client
Our client runs a café in Hong Kong. The café includes a small sitting area, counter and back kitchen. When running a restaurant, many risks could affect the business. The main risks of a restaurant that cooks the food on sight are fires, floods and electricity issues. No one wants to eat in the dark, and you can’t serve food in a burnt or flooded café.
Electricians can fix electrical issues within a week, but a fire or a flood can take months to renovate. Such unfortunate events can force businesses to shut down and renovate the damaged property. Resulting in large amounts of profit loss due to the business interruption.
In this case, the client’s café was a victim of a property fire. The fire broke out in the kitchen and went out of control. Luckily no one was hurt, and the firefighters arrived in time, so the fire did not spread to the neighbour’s property. Sadly the fire had almost destroyed the interior of the café. The fire damaged the walls, and the kitchen was not usable.
The client then called his surveyor to calculate his loss and how long it would take to renovate the café to reopen. The renovation of the café would take around one and half months (45 days). The 45 days renovation calculation was a shock to the owner. He knew he would still have to pay the restaurant’s rent, lose profit, and have to provide his employees with their salary. In these situations, this is usually is when the panic kicks in and the owner feel hopeless.
How Business Interruption Insurance was a Solution?
Thankfully, the client had purchased the business interruption insurance extension to his property all-risk insurance. Resulting in his property being insured and the interruption loss being covered too.
The insurance is a lifesaver and prevents business owners from feeling lost and struggling to manage after the crisis. A reopening should be grand, and the customers should be excited to have their local café back, and business interruption allows that. The insurance reimbursing all costs will enable the owner to focus on getting his customers back rather than counting each penny.
Business interruption insurance reimbursed the following costs to the client:
- Gross Profit: HKD 350,000 (Loss of income or profit based on latest financial statements)
- 1.5 month Rent: HKD 105,000 (HKD rent 70,000 per month)
- Employee Salary: HKD 225,000 (10 employees)
Total Reimbursed Cost: HKD 680,000
Business interruption insurance is an excellent addition to property all-risk insurance. Insurance is crucial in the F&B industry due to the range of risks. The insurance ensures that the policyholder does not need to worry even if the business is paused.
There is a deductible to the business interruption insurance: 48 hours, which means that you need to be impacted more than two days in a row to benefits of the insurance policy. For example, the insurance will not cover financial loss due to a one-day electricity blackout.
It is also essential to know most business interruption insurance policies won’t cover any interruption due to the pandemic.