Fire sprinkler with fire background


Get your business on track after a disaster

How to minimise the impact of business interruption

June 21 is the longest day of the year. In 2015, it was that and a lot more for the Kelly family, suppliers of the well-known KellyBronze turkeys. 

Around 9am that morning, a processing plant at the family’s Little Claydons farm operation near Chelmsford caught fire. Within hours, any hopes for a bumper Christmas – its most profitable period – went up in smoke. The loss of the main processing plant raised the possibility that it would not be able to satisfy orders for its high-quality range of turkeys or keep its production cycle on track.

Owner Paul Kelly faced every businessman’s worst nightmare: both his immediate prospects and his long-term business were threatened.

Fortunately, the company had business interruption cover from NFU Mutual. Less than a week after the fire, NFU Mutual had begun processing the fire claim to rebuild the plant, and had also activated the business interruption policy, which provided a substantial sum to cover losses resulting from down time, plus money for loss of stock.  

Paul Kelly said: “The whole thing was turned around in just 19 weeks. Our suppliers couldn’t have been more helpful. NFU Mutual was brilliant: they just get on with the job.”

Part of operational planning

The Kelly experience underlines what experts in risk assessment say, that business continuity should be part of the operational planning of every company, both large and small. It doesn’t need to focus on specific threats, although some sectors may be able to pinpoint their major risks. What it does need to do is set out in clear and unambiguous detail how the business will operate immediately after an incident, and how it will recover to business as usual as quickly as possible.

An important part of that plan will be the business interruption cover held. Mark Easy is Propositions Manager at NFU Mutual. He said it is surprising that a lot of businesses don’t consider they need this.

“If you have insured your warehouse and it burns down, we will build a new one,” said Mark. “But a normal policy doesn’t cover the loss of income during the down time. Clearly you still have expenses – salaries, for example – but no income. That’s what business interruption insurance is for.”

He said the whole purpose of business interruption cover is to get the business up and running as soon as possible and prevent potential insolvency.

Exposed to risks

Seasonal operations, such as those relying on tourism, are exposed to risks that are often beyond their control. A listed or historic building, for example, doesn’t need to suffer the catastrophic fire that hit Windsor Castle in 1992, or more recently the destruction of Clandon Park, near Guildford, to have its business severely interrupted.

Winter flooding in recent years has affected businesses in popular tourist areas such as York and the Lake District. In the hospitality industry, owners and operators “pull out all the stops to provide a great guest experience no matter what,” said the British Hospitality Association (BHA). If they can find a way to stay open, they will. Often that’s not enough.

Some of those businesses suffered badly from the perception that flooding had hit everything in those areas. Many traders, including hoteliers, restaurateurs and artists, found their business was down as much as 60 per cent. Well after the effects of the initial event have been dealt with, circumstances beyond the control of the hospitality industry, such as stories in the national press about isolated cases of unsightly flood debris, can have a negative impact over a wide area.

How long would you need to start from scratch?

Mark said business interruption cover is based on turnover and profit levels, as well as the indemnity period - the time period for which compensation is payable under a policy. “It depends on the industry, a manufacturing business for example may require an indemnity period of 24 months plus to replace bespoke machinery and premises,” he said. “However, an office-based business may require much less as it’s simpler to reinstate. The most important thing is that you have the conversation with someone who can advise you on the best way to protect the future of your business.”

Sector to sector, there are big differences in how business continuity coverage is embraced, Mark went on to say. Some sectors, such as the poultry industry, have a greater awareness of its potential benefits than others. In service industries, perhaps because the risks are less tangible, businesses do not have the same sense of urgency. A small accountancy firm, for example, might be capable of being back up and running in temporary offices within 24 hours of a burglary or fire, so the implications of a business interruption are potentially not as damaging as in manufacturing.

Specialist advisors can often help clarify the full spectrum of risks that a business faces. For example, a retailer might see its warehousing risk in terms of simple replacement of stock. This could take several months, depending on the goods’ origin. An emergency delivery timeline could also increase unit costs.

“Business interruption cover focuses on profit protection and reinstatement of business,” said Mark. In the retail scenario, it would replace lost income, as well as increased costs of sourcing new stock to satisfy existing orders.

“Some policies can also provide loss of income protection due to an incident at a supplier or customer which impacts your business or even loss of staff due to a lottery syndicate win,” added Mark.

Asking the right questions

UK organisations, such as the Financial Conduct Authority, have expressed concern recently that SMEs are under-insured, suggesting one reason is a change in how insurance cover is chosen. SMEs buying insurance online are less likely to have business interruption coverage than those who have consulted an insurance advisor.

“It’s all about asking the right questions about their business,” said Mark. “What sorts of things could happen and how would they recover quickly? Is their supply chain secure? Do they have alternate suppliers? If they lost a major customer, do they have a plan to replace that income?

“It’s just good business practice to consider such points and have adequate plans or insurance coverage in place.”