The requirement for advance profits cover is appropriate for any business undertaking new works for example the construction of a new building or the refurbishment of existing premises.
While business interruption insurance is appropriate for established businesses with existing income streams whereby the forecasted revenues may be evidenced by many previous years’ trading histories, it is inappropriate for firms with income streams which are yet to commence.
The following scenarios illustrate why advance profits insurance is important.
A chain of shoe shops decided to open additional premises. They agreed on a vacant shop, signed the lease and sent in their team of shop fitters to personalise the new premises. This work was planned to take six weeks before they could move in and start carrying on business from the new premises. However, a week before they had planned to occupy there was a serious fire and the opening was delayed for ten months.
A company working to full capacity from its factory decided to build an additional factory in its grounds to cater for the demand for its product. It was planned to build the new factory and start production within nine months. However a serious fire occurred a month before the start up date.
Production was delayed for eight months with serious financial loss.
In these examples, as the organisations had not begun trading at the new premises, the profit and loss accounts of the business were unaffected by the pre-trading damage and any claims under a traditional business interruption policy would have inevitably met rejection through failure of satisfying the material damage proviso which states that there must be in force an insurance policy covering the interest of the insured in the property that has been damaged.
This principle may appear confusing, however an asset destined for ownership or use by the business may not have been delivered by the contracting party to the business at the time of damage and therefore the organisation may have been unable to insure the asset through lack of an insurable interest as it may not have received title to the asset. As such the material damage proviso remains unsatisfied and cover under a business interruption policy would be unavailable with the result that the business would be forced to source a replacement asset, potentially delaying the works and extending the time before the business is able to trade with a consequent loss of turnover.
To avoid the financial loss that such scenarios would have created, cover under an advance profits insurance policy commences on the date the business planned to begin trading.
This concept works in concert with increased costs of working insurance. Should the damage to the income generating asset occur during the construction or refurbishment works preparatory to trading, the increased costs of working policy will provide funds to mitigate the damage before the advance profits indemnity period commences.
The funds available under the increased costs of working policy allow for an ‘acceleration’ of the works following damage to an asset, primarily aimed at limiting the delay before the business can trade and the period until the firm can generate income.
An increased costs of working policy is therefore beneficial for both the insured and insurer. The business is able to trade more quickly following damage to an asset and the insurer is able to limit its total settlement sum by indemnifying the business by placing it in a position to trade sooner than if they had not assisted.
Advance profits cover therefore insures against insurable contingencies which may delay the works to facilitate trading and provides funding through reasonable forecasts of the gross profit or revenue which the business reasonably plans to achieve from the date trading is planned to commence.
For a no obligation insurance review and to find out more about how we may be able to help you please call Horner Blakey Insurance Brokers on 020 7929 0108
