By Yaremis Hydes
Business interruption insurance is designed to protect a company’s financial health when operations are disrupted due to insured damage. In Cayman, the most pressing concern is that many businesses are currently either uninsured or inadequately insured against business interruption losses.
Particularly vulnerable are the small and medium-sized enterprises, which make up a large portion of local commerce and include businesses like beauty salons, restaurants and retail shops, among others.
Many business owners think they’re insured correctly, but there is widespread misunderstanding about what their existing policies actually cover. A business interruption policy is critical for a business; misunderstanding or undervaluing the risks has the potential to devastate small and large enterprises alike following a disaster or crisis.
Given Cayman’s vulnerability to hurricanes, its reliance on imports and the high cost of living, the consequences of underinsurance can be particularly severe.
Without adequate business interruption insurance, companies lack the financial buffer to cover lost income, rent, wages and other ongoing costs during periods of forced closure.
Business interruption is a very technical policy, requiring local market expertise to ensure you are purchasing the right cover and at the right price. As a result, some business owners are opting to forgo business interruption cover altogether, leaving them dangerously exposed.
So, here are some top tips to ensure your business is protected and that coverage limits don’t fall short if a crisis strikes:
1. Don’t estimate the cost of financial loss on balance sheet alone: It is critical to distinguish gross profit for insurance purposes from accounting gross profit. As well as loss of turnover, business interruption policies should also include all additional expenses reasonably incurred to mitigate the loss – for example, renting a temporary location, overtime wages, expedited shipping and so on.
2. Get your indemnity period right: This is the maximum time it will take your business to recover. A restaurant may take only six months to repair, but it might take another 12 months to recover lost clientele and pre-loss revenue, so always opt for 12 months of coverage.
3. Prepare an accurate costs breakdown: Accurately calculating the sum insured is essential to ensure full indemnity in the event of a loss. This involves identifying and excluding certain variable costs from gross profit and understanding the cost structure of the business, taking into account costs such as raw materials, utilities, fuel, phone bills, etc. Missed identification can lead to underinsurance. Get it wrong and the rule of average will apply, meaning you’ll be left with a significant shortfall.
4. Consult a broker to validate your figures: A skilled local broker will help determine the best approach for your business and place your policy with an underwriter that can deliver both the best terms and competitive premiums.
The lack of business interruption underinsurance in Cayman is not just a financial oversight, it is also a systemic risk. It threatens the resilience of businesses, the stability of the local economy and the livelihoods of residents. Speak to a broker with the skills and local knowledge to protect your business.
Yaremis Hydes is the managing partner of Consilium Insurance Brokers Cayman, part of the Aventum Group.
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