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Business interruption insurance
When a fire or a serious breakdown halts operations, the property policy pays for the repair, but not the margin lost or the fixed costs that keep running. That is what business interruption insurance covers.
Key points
Business interruption insurance covers the margin the company fails to earn and the fixed costs it continues to pay when a loss halts its operations. The property policy pays for the repair, but not this loss.
The Insurance Contract Act (Ley de Contrato de Seguro) regulates this cover as loss of profits insurance (articles 63 to 67): the insurer indemnifies the loss of the financial return that would have been achieved had the loss not occurred.
It is normally taken out alongside the property damage policy, and is only triggered if the damage that halts operations is covered by that policy.
What it covers
Lost margin
The profit the company fails to earn while operations are halted or reduced.
Fixed costs
Salaries, rents, depreciation and other costs that keep running during the stoppage.
Costs to mitigate the loss
Extraordinary costs to resume production sooner, such as relocating production or hiring machinery.
What to check before taking it out
The sum insured
It should be calculated on the company's actual margins, not simply on turnover.
The indemnity period
This is the maximum period covered by the policy. It has to be realistic: replacing a production line or a building can take more than a year.
The time deductible
The first days of stoppage, which the company bears itself.
Dependencies
If a loss at a key supplier or customer could halt your operations, specific cover exists for that risk.
Frequently asked questions
Doesn't the property policy already cover the stoppage?
No. The property policy indemnifies the damaged property. The lost margin and fixed costs are covered by business interruption insurance.
Can I take it out on its own?
It is normally taken out linked to the property damage policy, because it is triggered by damage covered by that policy.
How do I know what indemnity period I need?
By estimating how long it would take the company to return to its normal level of activity after the worst reasonable loss: rebuilding, machinery, permits and winning back customers.
Legislation cited: Insurance Contract Act 50/1980 (Ley de Contrato de Seguro), articles 63 to 67.
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