A common short-term insurance peril that many SMEs face when submitting a claim following an insured event is the risk of being underinsured. Photo: File

Small business owners who have a short-term commercial insurance policy are often not aware that they may not be covered for the loss of income, under a standard commercial policy.

Although a standard short-term insurance policy can assist SMEs to replace, repair or reinstate various assets following a loss, it does not provide cover against the loss of income as a result of a business being non-operational or not being able to provide a service following a covered loss.

"Business Interruption cover is offered by insurers as optional cover to protect a business against the loss of income following an insured event. For this cover to come into effect following a loss, there needs to be a financial loss to the business as a result of the unforeseen incident caused by a peril that is insured in terms of the underlying commercial short-term insurance policy," Malesela Maupa, Head of Insurer Relationships at FNB Insurance Brokers.

For instance, should a fire occur at business premises, the short-term insurance policy would cover costs related to repairing the building and replacing equipment or any other insured assets destroyed during the fire. Thereafter, Business Interruption cover would come into effect to cover the business against loss of income for the period it can’t operate.

Business Interruption cover can be extended to also protect businesses against losses due to incidents or disasters that occur at the premises of a third party, such as a supplier or customer. However, not all risks that occur outside the premises will be covered, if not specified.

Malesela said that a common question that SMEs usually ask about Business Interruption insurance cover is the amount of cover needed for their businesses. There isn’t a straight forward response to this question as every business is unique and may not be impacted the same.

The ideal approach is working together with your broker to undertake a risk assessment exercise to identify potential risks that may impact the business as well as the amount of time needed to recover. This will determine the amount of Business Interruption cover that a business should take out.

"The impact of shutting down business premises and not being able to run operations will not only lead to financial losses and cash flow disruptions, but could also threaten the survival of the business if it cannot fulfil its contractual obligations to customers and suppliers," concluded Malesela.

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