Business Interruption Insurance in Manufacturing Insurance Programs

Manufacturing Insurance Programs

When we think of insurance for manufacturers, we often think about the consequences of a fire or tornado at their factory location. What will it cost to repair the building and replace the inventory are primarily property insurance concerns. The issue that rarely receives the level of consideration that it deserves in manufacturing insurance programs is business interruption insurance.

I have written about general and products liability insurance in the past, along with product recall insurance. Additionally, I have written previously about manufacturer’s errors and omissions insurance coverage and various approaches for dealing with workers compensation insurance. This article is specific to the implications of business interruption insurance in a well-designed manufacturing insurance program.

What does Business Interruption Insurance Cover?

When a building is damaged by a covered peril, for example a fire or a tornado, it takes time to repair, rebuild and replace the inventory. Once the business is able to resume operations, it may take additional time to regain the customers that found alternative suppliers during the time the factory was shut down. During the time frame the business is generating less revenue and earning lower profits than before the loss. This time frame is referred to as the business interruption and can be covered by BI insurance.

A well designed business income or business interruption insurance coverage is normally built into the property insurance policy. In order for coverage to triggered, there must be an event that is caused by a covered peril. Most modern property insurance policies are “special perils” which means “all risk except as excluded in the policy.” So if your building is damaged by a fire and you have business interruption insurance built into your policy, the coverage would be triggered by the fire. Typical exclusions include flood and earthquake.

The design of business interruption insurance coverage can be tailored to your business situation. Business income coverage is typically written on either a lost earnings or a gross profit basis. It may include the extra expenses that your business will incur while shut down for things like renting alternative warehouse space, additional transportation, etc. You can even write it to include the payroll for employees that are temporarily out of work due to the shutdown.

How to Obtain Business Interruption Insurance Coverage

You should begin by talking to an experienced manufacturing insurance agent to learn more manufacturing insurance programs in general and business interruption insurance in particular. That agent should walk you through the various options that are available in designing the coverage. Some of those variables are identified in the business income worksheet, which requires you to estimate how long an event would close you down, what revenue would be lost, what expenses would continue, etc. The business income worksheet will be an important tool in deciding how much insurance to purchase and in applying for it with an insurance carrier.

Once the insurance agent has the information that they need to obtain the coverage, the agent should submit your information to the insurance carrier underwriters, who will provide him with a proposal. All of the things that guide you in selecting an insurance carrier for your manufacturing insurance program apply to this important component of your manufacturing insurance program. Carefully evaluate the coverage provided, the financial strength of the insurance company and the services that they will provide in making your business interruption insurance decision.

Contact Ahmann-Martin: To build an insurance policy that will be effective and affordable, you need a company that customizes your policy for you. Visit us at Small Business Liability consult with an insurance professional who will construct an insurance program that will work for you.

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Russ Birch, CPCU, ARM has 33 years of experience in the commercial insurance industry in roles ranging from underwriting to sales and marketing management. In addition to his Chartered Property Casualty Underwriter and Associate in Risk Management designations, he holds an MBA in Finance from the University of Minnesota. He currently leads a team of professionals at Ahmann-Martin in suburban Minneapolis.