Do You Need Business Interruption Insurance?
Catastrophes like floods and fires do occur and there is insurance to cater for these types of events. There are two different types of insurance cover for these events – one to repair or replace the assets damaged (your normal insurance policy) and one to compensate you for the losses incurred during the time it takes to get the business going again. This latter one is known as ‘Business Interruption’ or ‘Loss of Profits’ insurance.
Statistics show that nearly three out of four businesses never recover from a catastrophic event and it is therefore important to ensure that your Business Interruption insurance has been carefully thought through.
What to insure for
You need to have a good grasp of your costs and expected sales and gross profit. You don’t want to underinsure so if your business is growing reflect that fact – for example if you expect 10% growth (and trends in your business justify this) show this to insurers or you won’t get paid out this additional amount.
It is important to make sure that all your projections are well grounded and can be defended as they will be closely scrutinised by loss adjustors in the event of a claim. Thus, the better you understand your costs, the less chance of having a claim either rejected or adjusted downwards.
Another critical factor is the indemnity period. This is the time you will be covered for whilst out of business. For example, if you put a six-month indemnity period in your policy, you will only get paid out for six months even if it takes twelve months to get the business back on its feet again.
Let’s look at an example…
Bernie has a cosmetics factory and his year end is 31 December.
| Bernie’s Cosmetics Factory | ||||
| Budget for Year | R | |||
| Sales | 120,000 | |||
| Cost of Sales | (45,000) | |||
| Purchases | (10,000) | ** | ||
| Wages | (35,000) | |||
| = GROSS PROFIT | 75,000 | |||
| COSTS | (46,000) | |||
| Salaries | (20,000) | |||
| Distribution | (6,000) | ** | ||
| Maintenance | (5,000) | ** | ||
| Rent | (15,000) | |||
| = PROFIT | 29,000 | |||
On January 2, the factory burns down. It will take 12 months to get the factory up and running again.
| Business Interruption Claim | R | |||
| ADJUSTED GROSS PROFIT | 65,000 | |||
| Gross Profit | 75,000 | |||
| Less Purchases | (10,000) | |||
| COSTS INCURRED | 40,000 | |||
| Salaries | 20,000 | |||
| Rent | 15,000 | |||
| Preparation Cost | 5,000 | *** | ||
| = CLAIM | 105,000 | * | ||
| *Adjusted gross profit plus your incurred costs. | ||||
| **Variable costs which will not be incurred in the 12-month period of re-establishing the factory. | ||||
| ***Putting together claims is a time-consuming task, so include it in your policy. | ||||
| NB! Include VAT in the assured amount as insurance pay outs include VAT. | ||||
You can see from this simple example that this is a very complex process – spend time with your accountant getting to grips with your revenues and costs. Also use a reliable insurance broker.
Remember that 43% of businesses that suffer a catastrophe never trade again and a further 29% go out of business within two years.
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Directors: “Knowing” Is A Potentially Career-Threatening Word for You
“An investment in knowledge pays the best interest” (Benjamin Franklin)
The Companies Act 2008 places onerous duties on directors and if you do not meet these obligations, you risk personal liability for any damages flowing from these actions.
“Knowing” in the company law context
A director gets “knowing” (actual knowledge) of the company by remaining apprised of the conditions of the relevant industry, what is revealed by the media of the business or its competitors and from the “pack” of data received before a directors’ meeting.
The Companies Act goes further and says a director “reasonably ought” to know important matters in the company. In other words, a director should look beyond what is presented to him and be on the lookout for any other issues that could impact the company.
To gain “reasonably ought” to know information, a director should investigate pertinent matters or may take “other measures” which would result in gaining valuable data – for example, the director may contact an executive director to clarify a matter.
An example to clarify – how to protect yourself from personal liability
- Let’s take “Bill”, a non-executive director of a company which has a subsidiary that imports equipment from China. Bill knows that the subsidiary has purchased a building and owes a R20 million bond on it. The company has guaranteed the R20 million liability.
- Bill has a board meeting in a week’s time and finds that there is no mention of the subsidiary’s bond in his management pack.
- He has read about the new COVID-19 coronavirus and realises that the factory that supplies the equipment to the subsidiary has been temporarily closed and it will take more than a month to get the factory back in production when it reopens. It will then take one month for it to build up stock. Shipping time to South Africa is six weeks. Bill finds out that the subsidiary has only one month’s stock and thus faces potentially about three months of trading without stock. The subsidiary is highly geared, and Bill is concerned that it could stop trading which would mean the R20 million guarantee will be called up and this could affect the company’s solvency.
- Naturally, Bill carefully documents all of this and raises his concerns at the board meeting.
- A majority of the board are reassured by the executive directors that Bill’s concerns are not valid. Four months later, the subsidiary ceases trading, and it and the company end up in liquidation.
- An investigation is carried out and one of its findings is that the company “reasonably ought” to have anticipated that the coronavirus would create solvency problems for the subsidiary and their failure to act has caused both companies substantial losses. Consequently, the directors are personally liable for these losses.
- Not all directors of course, as Bill shows the investigators the work he did and how he was outvoted at the board meeting. He avoids being held liable for the losses.
Directors be wary of this – don’t just rely on management packs etc but also look for the matters you “ought to know” about. This applies also to alternate directors and senior managers who are deemed by the Companies Act to effectively have the powers of directors.
