It is the stuff of nightmares for every small business owner: wake up one morning and the enterprise has been destroyed by fire. Or watch, powerless, as flood ruins a lifetime of work.
But there is a way to protect your business from disaster - business interruption insurance. With so many natural catastrophes happening in Australia in recent years, it's essential for small businesses to consider business interruption insurance, whether this means checking levels of cover or acquiring cover where none exists.
Mark Searles, chief executive of insurance broking business Austbrokers, says any business interruption could be a major setback that threatens the very survival of a business, particularly when margins are already tight, as is often the case these days.
"Research has shown that one in four small businesses would not recover if forced to close the doors for three months," he says.
Aside from struggling to stay in business while they recover from a loss, many businesses also fall behind paying bills because they are unable to perform to their normal capacity.
"The intention of business interruption insurance is to protect a business against a shortfall in sales following an insured loss such as a fire or storm," says Brent Lehmann, state general manager, Victoria, with insurance brokers Willis Australia.
Business interruption cover will pay for ongoing costs such as a business's lease, payroll and mortgage, as well as covering loss of profits.
"In effect, the insurer takes the place of the business's customers, making up the resulting loss of gross profit caused by a drop in producing or supplying goods to sell," Lehmann says.
Like Searles, he says Willis' claims history shows that without business interruption insurance, or with incorrectly calculated cover, there is a high probability a business affected by a disaster will not reopen or recover to pre-loss levels.
"This is the reason this type of cover is so important for small businesses," Lehman says.
A vital variable to be considered when arranging business interruption insurance is the indemnity period. This is the period of time during which the loss of gross profit - and other insured items - will be paid by the policy.
"The challenge is for the small business owner to anticipate the worst-case scenario for their business and how long the adverse impact of such a loss would continue," Lehman says. "At first look, most people consider the time to rebuild or relocate premises, install replacement machinery and plant. They will also think about the cost to replace computers and resurrect telecommunications, electricity and water. But unfortunately this only scratches the surface."
After considering what happens to customers and employees while the business is rebuilt, as well as how long it will take for customers return, estimating the time it will take to resume "normal" operations becomes complicated.
This is when it becomes valuable to work with an insurance broker, who can help business owners consider all factors relevant to their specific business environment and correctly calculate the indemnity period required, as well as the sum insured under the policy.
Business interruption not only covers events that directly harm a business; it also includes events that have an indirect impact.
Leigh Smith, senior leader, commercial insurance portfolio, at GIO, says: "A common example is if you operate in a shopping centre and there's a fire in another part of the centre and that means customers cannot access your shop. Although your shop didn't have the fire, your business interruption cover can be triggered and protect your profit."
Adrian Clerici, partner at Pitcher Partners business advisory and accountants, says the major risk of not having the right cover is the inability to access funds quickly to ensure a fast recovery without too much impact on the business's bottom line.
"It's important to be able to continue servicing existing contracts without too great an interruption that could otherwise damage a business's goodwill."
Business interruption cover can also help a business relocate to new premises and expedite moving equipment to keep it going, says Mike Cutter, OAMPS Insurance Brokers chief executive.
He says one of the best qualities of business interruption insurance is that it is in the insurer's best interest to get the business back up and operating as soon as possible.
"Our strongest recommendation to small business clients is to have a contingency plan. Insurance should be a key part of that plan, but also consider mitigating other risks by creating a business continuity plan."