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Business Interruption for Lumber Mills: How to Protect Your Income

In a global business landscape that is increasingly complex and volatile, the threat of business interruption has consistently ranked as a top concern facing companies worldwide.

According to the Allianz Risk Barometer for 2024, business interruption topped the list as one of the biggest concerns in Canada (with 57% of respondents ranking it their number one concern) and for those in the manufacturing, heavy industry, oil & gas, and power & utilities sectors.

As demonstrated by a loss of over $500 million suffered by a manufacturing giant in 2022, insurance can be absolutely critical for maintaining operations, retaining employees, preserving cash flow and protecting profit levels – particularly as it takes longer and longer to recover due to a variety of factors such as increasing equipment lead times, supply chain interruptions and labour restrictions.

Protect what matters

Business interruption losses can completely disrupt a business’ ability to operate and put its survival at risk:

  • Customers are lost.
  • Operations struggle to continue.
  • Cash flow issues arise as revenues decrease or stop entirely.
  • Operating expenses continue to be incurred.
  • Costly mitigation efforts are undertaken.

According to a report from the Federal Emergency Management Agency (FEMA), 40 to 60 per cent of businesses do not reopen following a disaster and 25 per cent fail within the first year
of resuming operations. How long could your business survive?

Business interruption insurance explained

Business interruption insurance provides protection against the loss of income arising from physical damage to buildings, structures, equipment or stock from fire, water damage or other covered sources of loss.

The policy pays for the lost income suffered as revenues or production decreases or stops entirely, operating costs continue, and mitigation costs are incurred. Coverage typically lasts for the full period of time in which the business is affected by the damage.

Coverage can also be expanded through a range of policy extensions and endorsements to include incidents beyond physical damage to the insured premises, including damage to key customer or supplier locations, equipment breakdown, digital systems failure, cybersecurity breaches and more.

Who is business interruption insurance for?

Business interruption insurance is critical for operations that rely heavily on their physical premises and the associated property and equipment used for revenue-generating activities.

Examples of business interruption losses at lumber mills

  • A lumber mill suffered a malfunction with a transformer which led to over a month of downtime.
  • A lumber mill had a fire with one of their specialized machines; the downtime was over eighteen months.
  • A sparking bandsaw at a lumber mill in BC led to a fire that took out the side of a building. The fire also resulted in significant water damage from rescue efforts, leading to over a month of downtime.
  • A lumber mill in North Carolina was required to shut down their mill following a cyberattack on their operating system.

Key considerations for business interruption coverage

  • Get the limits right. We consistently see business interruption coverage limits that should be higher by 40 per cent or more!
  • What types of loss could significantly impact your ability to generate income?
  • How long would it take to recover from a major loss? It is not uncommon to see losses impact businesses for 24 months or more!
  • Can payroll costs be scaled back easily when shut down? How critical are your personnel to the business on an ongoing basis?
  • Do you have multiple locations? Are they interdependent? What excess capacity do you have to mitigate a loss?
  • Would damage to a key supplier location significantly impact your ability to generate income?

How much does business interruption insurance cost?

The cost of business interruption varies between businesses. Much like your property insurance, ratings by underwriters will be determined by
several factors including:

  • Industry
  • Property location(s)
  • Insurable values
  • Scope of coverage needed (i.e. income and indemnity periods)
  • Payroll requirements
  • Mitigation options available
  • Operational bottlenecks and capacity levels
  • Prior claims experience

How can organizations prepare?

A pre-loss preparedness (or business continuity) plan, is key to effectively responding to downtime from a loss. Your plan should be regularly revisited and updated to consider all situations and scenarios with emerging risks.

A business interruption insurance review from our partners at Roper Valuation will ensure that you have adequate limits and effective coverage that will respond to your needs.

Don’t wait for a crisis; act now to secure the protection your business deserves. Connect with an Acera Insurance advisor today.

Written by Will Downing. Will is a Client Executive with Acera Insurance. He brings specialized expertise serving clients of all sizes in forestry and wood product manufacturing across Canada.