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What is Business interruption insurance and why is it beneficial to your fitness business?

Updated: May 2, 2019

If you operate a business within the fitness industry, such as a gym or yoga studio, it may be worth purchasing a business interruption policy to help cover a loss of income in the event of an insured material loss. Essentially it is a policy that will help a business recover and get it back running on its own two feet again.

An example of a loss covered by a business interruption policy would be as follows: a fire occurs at a gym and the damage caused leaves the premises unable to be used by its clients. The business interruption policy would then pay the lost revenue to the gym which would allow them to still have an income whilst the premises is being repaired and ready to start taking custom again. They will still have overheads which will need to be paid, such as staffing costs. Not having the BI policy in place may mean that the business would have to close as it may not be able to meet its financial obligations during the period of closure.

There are various forms of business interruption which we will now discuss. It’s important that you explore the options available with your broker as this can affect policy pricing and the level of indemnity received. Each type of BI cover is usually particular to a business’s own requirements.

The most common method of BI is to be insured is on a gross profit basis. This will help a business get back in the position where it would have been following a claim by paying for a loss of profit. it is most suited to businesses that have a lot of uninsured working expenses (variable costs). This method is not generally suited to the fitness industry and is more so suited to retail/manufacturing. On the most part, fitness type businesses (i.e. health clubs) are insured on a gross revenue basis, which we will explore in the next paragraph.

shop business interruption
Retail Outlet

Gross revenue BI is more suited to the services industry, such as fitness based business, accountants and solicitors Etc. the reason why service based businesses are generally insured of a GR basis is that their costs do not reduce in the event of a loss, whereas businesses that are insured on a gross profit basis do. for example, if you own a gym and you have a loss at the premises, your running costs will usually stay the same. The gross profit figure of a gym may not be enough to meet all of its annual costs hence the reason that the gross revenue sum insured will be the full annual turnover of the business.

Group exercise class
Group Exercise Class

Thirdly, another option is to insure the business on an increased cost of working basis. This is most suitable to those businesses which are most resilient to a loss and will only need a smaller amount of cash in order to keep the business flowing. This method is usually most cost effective but you will not get the same amount of cover. The ICOW limit will need to be specified on the schedule of insurance. Organisations who have multiple locations or have a lot of cash will generally use the ICOW method as they can manage a loss at one particular locations using their own resources, or ramping up production at another plant, for example.

Another element to be aware of are the indemnity periods, which can be over a 12, 18, 24 and 36 month timescale. This is what would be the time considered that your business could get back up and running again following a loss. For example, if there was a flood your Yoga studio’s premises, how long would it be before you could be back trading following works to the premises. Would 12 months be enough? Or would you need 18, 24 months? These are all points to think about when adding BI to your commercial insurance portfolio.

Having explored the different basis on which business interruption insurance can be sought and why it is of significant important to a business, we can make the assumption that it would be beneficial for most SME and especially larger business to purchase this type of insurance if they’re conducting business from a specific location(s). If you would like help with your business interruption insurance, please follow the link below and feel free to call us and discuss your requirements

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