Using Insurance to Set Your Business Continuity Plan Up for Success

Ensuring that your local government has proper business interruption coverage is essential to any business continuity plan (BCP). By understanding your coverage, you maximize the effectiveness of a BCP when an unexpected insured loss occurs.

Like property coverage, business interruption coverage is intended to restore you to your pre-loss position. It covers the extra expenses and loss of income your local government may incur if a facility is shut down for repair or rebuild due to a loss, until it is able to resume normal business operations or for the time it would have been reasonably necessary to repair, rebuild or replace the asset.

Let’s say the City of Dreams has a municipal hall and recreation facility operating at the same location. The City operates at this location with dozens of staff and leases part of it to commercial tenants. The recreation facility is also rented to the public for birthday parties and weddings.

Unexpectedly, a fire damaged both buildings and it will take over 18 months to rebuild. While the City was diligent with keeping its location values up to date, it hadn’t updated its business interruption coverage for years. The City only has a $500,000 business interruption limit that can be paid for a maximum of 12 months.

Because of the loss, the City has incurred costs to reduce the disruption to operations, including leasing new workspace. The City is also losing income because it isn’t collecting rent or facility rental fees. Unfortunately, the City’s coverage is insufficient because its extra expenses and income loss exceeds the policy limit and the interruption will continue beyond the policy’s period of indemnity.

To ensure that your local government has sufficient business interruption coverage, we recommend reviewing your property insurance policies annually. When reviewing coverage, look at: • Limits – Your limits will depend on your projected loss of income and any extra expenses you will incur from a loss. Often, local governments only review their rental income when determining their limits, which might be significantly less than income generated from sale of services such as recreation. • Period of Indemnity – This is the maximum amount of time the coverage will help pay for business interruption. It is expressed in months and usually ranges from 12 to 36 months. A small facility may take a year or less to rebuild or repair, but a large building could take years. Your period of indemnity should reflect the time it will take to recover. • Waiting Periods – Some policies specify the number of days that you must wait before coverage is triggered to ensure there is a real interruption to operations, rather than a short, temporary shutdown. These waiting periods may differ in certain circumstances.

Local governments should pay attention to their business interruption coverage not only under their property insurance policy, but also their equipment breakdown policy, which insures against losses caused by electrical arcing, mechanical breakdown and explosion of boilers and pressure vessels.

Your insurance provider can walk you through your business interruption coverage so don’t hesitate to reach out for assistance.

MARINA SEN became the MIABC’s first licensed insurance broker when the Insurance Department was created in April 2014, playing a key role in the development and implementation of the MIABC’s Property Insurance Program and the establishment of the MIABC’s brokerage arm, Civic Risk Insurance Solutions. In addition to her hands-on insurance experience, she has also obtained the Charted Insurance Professional, Canadian Accredited Insurance Broker and Canadian Risk Management designations.