In an exciting collaboration between Minet Malawi, Britam, and The Daily Times - Malawi's leading newspaper - we are thrilled to introduce a groundbreaking initiative that will redefine your Wednesdays. Welcome to the Insurance Insights Column – a weekly rendezvous with the world of insurance and contemporary issues that matter. Every article aims to illuminate the intricate landscape of insurance products and relevant topics that impact us all. The articles will be educative at all levels, catering to both practitioners and non-practitioners.
As published in The Daily Times (Malawi) on May 8th, 2024
Sir Isaac Newton’s brightest idea of the third law of motion states that ‘for every action, there is an equal and opposite reaction.’ What happens when you bang your head on a wall? Yes, you experience uncontrollable pain. Newton’s impressive scientific explanation to the puzzle is that the force that you hit the wall with is equal to the force that the wall exerts back to you. You and the wall are exerting force on each other in opposite directions. Stated differently, the wall hits you back with the same force. Therefore, it works out that the greater the force from you, the stronger the response from the wall, the worse the injury on your head and vice versa.
Similarly, in insurance when the extent of damage to property is severe, consequences are also devastating. A small fire that chars a business building naturally calls for small attention and indeed small re-organization in bringing the business back to its normal trading position.
Take a case of a famous hotel that got damaged by floods in Likoma Island, some weeks ago. Lake Malawi - some people call it Lake Niassa - seems to have broken its seashore. The water level is rising and causing untold damage to property along the shore. All is not lost. If owners of the hotel in point have insurance covering the building and contents therein, insurers will definitely compensate them for the damage, including removal of debris, albeit to a limit. Notwithstanding the foregoing, there is one element of the business that business people world-over often forget to insure – consequent loss of business.
Suppose a business is gutted down by fire leading to closure of the processing units for months as the owner carries out repairs. Clearly, his fire insurance policy will pay for cost of the damaged raw materials, works-in-progress, stocks-in-trade, building, plant, machinery and equipment, among other items.
Despite this state of affair, it is necessary to retain some charge hands or technical employees to assist in re-organization and to render other essential services to customers. In some cases, the business is supposed to pay certain essential standing expenses, such as bank interest - if the owner had secured a bank loan - city rates and utility bills. These expenses have to be paid, whether the business is producing or not. Staff has to be paid wages, too. As far as matters of law are concerned, the business has not been closed down. It has just ceased offering services. Thus, employees have to be paid.
At the same time, the business is unable to neither earn profit on the unsold stocks nor collect revenue from its customers on previously sold merchandise. The ultimate loss may be so devastating that the business may close down indefinitely. Realizing the importance of net profit, which is the key index of any company’s prosperity, insurers devised consequential loss coverage popularly known as business interruption insurance to cater for such eventualities.
As the term suggests, loss of business insurance seeks to indemnify a business owner against loss that a business incurs resulting from interruption of or interference from an insured peril. Insured perils are fire, special perils and machinery breakdown.
Loss of business insurance is designed to make good overheads of a business in respect of any turnover or output lost. As mentioned above, sometimes the business needs to retain some employees or all of them, though not gainfully employed, to assist in bringing the business back to its normal trading position. Wages for such employees are insured. It also pays for additional working costs to avoid reduction in turnover and ultimately ensures that the business mogul earns the same profit that he had anticipated to collect had the loss event not triggered.
The effects of a material damage loss on the trading vary considerably from business to business as simulated by the Newton’s Third Law of Motion, above. When taking a business interruption cover, one has to decide the maximum period one estimates one would require getting the business back to normal, if one’s premises are completely gutted down. This period is known as indemnity period. It is the time after the damage has occurred, during which one’s insurers are liable to indemnify the insured.
Views from the top are that the efficacy of loss of business insurance is being realized gradually among the business community. It is a must-have for all businesses, including ventures such as hotels situated along Lake Niassa and other water bodies. Talk to us. We are here to serve.
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