Business Interruption Insurance Protection - Essential or Just Another Expense? - Helen Tarrant

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Business Interruption Insurance Protection -
Essential or Just Another Expense?

• Welcome to our latest market outlook written by
  our insurance partner at Method Insurance
  Brokers.
• Their in-depth analysis and insights into the
  interest rate and inflation tug-of-war are
  incredibly informative, making it a must-read for
  both seasoned investors and those new to the
  world of finance.
• Were excited to share this informative article
  with you, and we hope you find it valuable as
  you navigate the complex world of free resources
  for property investors in australia.
• Business Interruption Insurance
• The purpose of Business Interruption (BI) is to
  protect against a loss of revenue caused by an
  insurance event. For property owners, your
  revenue is gross rental income.
• While the terms of a lease will include many
  protections for the property owner, there are
  circumstances where your tenant can stop paying
  rent because of damage caused to your property
  investment event in australia.
• You may not think twice about insuring your asset
  against fire and other perils. Purchasing
  property insurance on the building provides
  protection against the asset only. Business
  interruption provides protection against loss of
  gross rental income while your property is
  unable to be tenanted following an insured event.
• Property insurance covers rebuilding the asset.
• Business interruption covers the loss of gross
  income, while the asset is being rebuilt.
• Where finance is involved, protecting the rental
  income generated from your asset is essential.
• Business Interruption cover is not automatic, it
  is an optional section under most policies
  therefore do not assume if the asset is insured,
  that business interruption is automatically
  covered.

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Typically these types of covers are only
triggered where your tenant has means under the
lease to stop paying their usual rental payments
to you. Business interruption does not cover
tenant default (where the tenant withholds rent
due to a commercial dispute). Cover for tenant
default may be available in the insurance
market, however such coverage can be difficult to
obtain. Insurers do not cover business
interruption caused by communicable disease,
including pandemics or endemics. Breaking it
down How does Business Interruption insurance
actually work? The coverage begins on the date
of the damage and/or loss and continues until the
rental income is restored to the level it would
have been if the loss had not occurred, or to
the end of the Period of Indemnity (POI). The POI
duration is selected by the policy holder when
the coverage is purchased. The period is stated
in months on the policy schedule and can usually
range from 6 months to 36 months, depending on
the insurer. Due to the high demand on the
construction industry, shortage of labour and
supply chain issues, property owners need to
consider increasing their POI to ensure adequate
coverage. Determining the length may depend on
location, building size, materials and size of
the event (singular or large catastrophe) among
other factors. Furthermore, delays in the
project timeline may also be caused by factors
such as obtaining development approval from the
council or undergoing investigations by the fire
department, WorkCover and other relevant
authorities. real estate property events in
Australia During an insurance event, there are
usually additional costs incurred beyond the loss
of revenue to consider such as the cost to
prepare your claim (accountants professional
fees). You can also insure Additional Increase
Cost of Working to cover additional costs
incurred to avoid a loss of rental income. For
example, hiring a portable toilet block where
your office toilet is unusable following an
insured event. These costs can be significant,
especially for larger losses and your insurance
broker should discuss these options with
you. Dont get caught out Why underinsurance
is trouble waiting to happen! Free commercial
property investor resources in Australia are
crucial in providing accurate information
especially if a policy holder is unsure. Consult
your property manager for precise rental
information. Ensure your declared rental income
matches the terms of your lease. Underinsurance
in a business interruption policy can occur when
a policy holder insures for less than the actual
gross rental income. Key Consideration Factors
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• Was CPI applied to the lease, and if yes, is it a
  fixed or market rate?
• Has the occupancy rate increased since your last
  review?
• Have any tenancies changed, with the new tenants
  paying a higher rate?
• Has there been any building extensions, if so,
  has your rental income increased?
• Is your lease inclusive of exclusive of
  outgoings?
• Are you registered for GST?
• As an insurance broker we work closely with
  various other companies that provide value to
  our policy holders. Another company that we
  utilise the services of is LMI Group who focus
  primarily on Business Interruption. See below an
  example from LMI of how underinsurance can be
  calculated.
• If we insured for 500,000 and the actual gross
  rental is 800,000 at the time of the loss. At
  200,000 the claim would be adjusted down to
  125,000, leaving the property owner with a
  self-insured loss of 75,000.
• Business Interruption insurance is more
  affordable than you might think!
• The cost of Business Interruption insurance is
  typically determined by a number of factors,
  including the insured value, period of insurance
  and prior loss experience. Insured value refers
  to the maximum amount of coverage that the policy
  will provide in the event of a business
  interruption. The higher the insured value, the
  higher the premium will typically be.
• The period of insurance is the length of time for
  which the coverage will be in effect. This can
  range from a few months to several years,
  depending on the needs of the business. The
  longer the period of insurance, the higher the
  premium will typically be.
• Prior loss experience is another important factor
  that can impact the cost of Business
  Interruption insurance. If a business has a
  history of losses due to business interruption,
  the premium may be higher to reflect the
  increased risk. Conversely, if a business has a
  good track record of avoiding business
  interruptions, the premium may be lower.