Loss-of-profit income: How to stay afloat until normalcy is restored after a disaster

In the event of a disaster, receiving compensation for the damages caused is essential to overcoming such a crisis.

However, a severe incident can also halt operations, and the recovery and restart period could extend for months, or even years, especially in complex industrial businesses.

Meanwhile, your business will continue to face ongoing costs, even if the production process is completely halted: wages, loan payments, rent, taxes, minimum energy consumption, water, communications, and more.

Suppose a pipe bursts and floods your business premises or commercial space. The water damage coverage in your multi-risk insurance will take care of the destruction, but you likely won’t be able to resume operations while repairs are underway.

This is when loss-of-income insurance comes into play. Your insurer will compensate you for the downtime, helping your business recover more easily.

While this insurance originally only covered damages from fire or explosion, today it’s possible to include other causes such as flooding or breakdowns of key machinery in an industry’s production process.

Furthermore, the insurance market offers specific solutions for various situations, such as event cancellations due to weather conditions, artist no-shows, power outages, or other causes. Losses from the cancellation of conferences, trade fairs, exhibitions, sports competitions, etc., can also be insured.

By taking out this insurance, the insurer guarantees compensation for the lost income caused by the disaster. However, not all losses can be covered, such as reputational damage.

It’s common for loss-of-income insurance to include a time-based deductible (typically between 2 and 7 days). This means that once compensation is calculated, the insurance company won’t cover losses for those initial days.

Regarding the compensation period, there are differences between the U.S. and European models. In the U.S., it generally covers the period from the day of the incident (when activity halts) until production capacity is restored. In Europe, however, the Loss of Income model continues until the income statement is fully recovered.

As we’ve seen, this insurance is essential for businesses, offering crucial support by ensuring their continuity after being impacted by force majeure events.

If you’re still unsure, consider this: research shows that a significant number of companies (seven out of ten) fail to recover after a major disaster if they don’t have loss-of-income coverage. According to a study by Fundación MAPFRE and Cepyme, this lack of coverage can lead to business failure.

So, if you own a business, don’t wait—get this coverage, as it can be vital for your company’s survival in the event of a major setback that halts your operations.

RELATED ARTICLES: