By Lucy Sousa

If, during the course of doing business, you need to make an insurance claim, property insurance will cover your physical assets, but not protect potential loss of income. If you suffer a substantial loss and cannot open your business for months, you could lose customers and employees and your business may not survive.

This is why business interruption insurance is one of the most important types of coverage for your franchise. It will cover not only your lost profits and fixed expenses, but also your increased expenses after an insured loss.

There are many different forms of business interruption insurance. ‘Extra expense’ coverage will reimburse your business for a reasonable sum of money you must spend, over and above your normal operating costs, to avoid having to shut down during the period of restoration after loss. This sum will usually be paid if it can help reduce business interruption costs.

A ‘gross profits’ form is the most popular type of business interruption insurance. Gross profits are defined as net profits before tax, plus all of the expenses that would continue in the event of an insured loss. A profits worksheet is completed to determine the coverage required. This coverage begins the day your loss occurs and continues until the date your gross profit reaches the limit it would have been at had the loss never occurred, subject to the indemnity period you have purchased.

For example, if a franchise carries a 12-month period of indemnity, experiences a loss and is back in business six months later, but has not yet reached previously experienced profit levels, the policy will continue to pay for another six months.

Some insurance policies cover business interruption on an ‘actual loss sustained’ basis. A profits worksheet is not required with some insurers. The advantage of this form of insurance is co-insurance is not an issue.

It is normal for business interruption insurance to carry a 12-month indemnity period, such that coverage begins on the date of the loss and can continue until it even exceeds the expiry date of the policy. Depending on the nature of your franchise, however, 12 months may not be adequate. You may need to look at an 18- or 24-month period of indemnity instead.

If your franchise relies heavily on another business to supply goods, services or customers—or if you rely on one particular customer for a sizable portion of your sales—you may need contingent business interruption exposure insurance. This coverage applies if your supplier or customer suffers an insured loss at its premises that in turn has a negative impact on your income.

Also, when you own and operate a franchise in a shopping mall, plaza or other retail environment where there is a major anchor store, you could experience a contingent business interruption loss it that anchor store suffers a large, insured loss that reduces the flow of customers to your location and, ultimately, results in a loss of revenue to your business. So, it is important to discuss this type of coverage with your broker in relation to your franchise’s location.

Read the full article: Toughest Part of Your Job: Insuring Your Franchise

By Lucy Sousa

As a franchisee, you will need to insure for the replacement costs of your contents, equipment and leasehold improvements, commonly referred to as ‘Contents of Every Description’ (COED) or ‘Property of Every Description’ (POED). Replacement cost coverage will provide new for old, without deduction for depreciation.

If you own a building, it will also be insured on a replacement cost basis. Stock is usually insured on your cost price, but it can also be insured on its selling price.

One of the keys is ‘insurance to value.’ It is important to insure for adequate limits, up to 100 per cent of your total values, to avoid co-insurance penalties in the event of a loss.

If there is an 80 per cent co-insurance clause on your policy, for example, it requires you to insure to a minimum of 80 per cent of your total values. Otherwise, if a partial loss occurs, the insurer will calculate the percentage you are underinsured and apply a co-insurance penalty.

Some polices are on a ‘stated amount’ basis. In these cases, a co-insurance penalty will not be applied, provided you have completed and returned a statement of values, which your insurance broker then provides to the insurer.

If your stock is to be insured for its selling price, you must add your markup to your cost price to determine the limit of insurance required. If your stock limits will vary throughout the year, make sure to advise your insurance broker about these changes.

Read the full article: Toughest Part of Your Job: Insuring Your Franchise