Business interruption insurance is designed to serve as a financial lifeline if you are ever forced to suspend operations due to circumstances beyond your control. It helps maintain your cash flow during the downtime, covering lost income and fixed expenses such as rent, payroll and loan payments as well as costs for temporary relocation. However, the effectiveness of this coverage in keeping your business afloat can heavily depend on one often-overlooked factor: the indemnity period.
What is the indemnity period under a business interruption policy?
The indemnity period is the length of time that the policy will continue to pay claims, starting from the date of the event that caused the shutdown until either normal operations resume, or the maximum time limit has been reached (as stated in the policy terms).
A typical indemnity period is 12 months. Is this enough?
Many businesses underestimate how long it takes to fully recover from a significant disruption, leading to coverage that expires before they are back up and running. In the current landscape of economic uncertainty, geopolitical shifts, and supply chain complexities, businesses must carefully assess their indemnity periods to avoid underestimating the true timeline of their recovery.
Business interruption is the top risk concerning Canadian businesses according to the Allianz Risk Barometer, as supply chain disruptions with global effects now occur approximately every 1.4 years.
Six reasons to opt for an extended period of indemnity
1. Increasing recovery periods for businesses
- Many businesses take more than 12 months to recover, especially after severe property damage from fires, flooding or natural disasters.
- Rebuilding, replacing equipment and regaining lost business can take longer than expected.
2. Delays in construction and permitting
- Rebuilding or repairing commercial properties often requires permits, inspections, and contractor availability, which can cause significant delays.
- In urban areas, supply chain disruptions and workforce shortages can further extend repair times beyond 12 months.
3. Time to regain market share and revenue stability
- Even after reopening, businesses need time after a prolonged interruption to reestablish customers relationships, reinstate supplier contracts and return to normal revenue levels.
- Some businesses, such as hotels, restaurants, or manufacturing plants, may require additional time to reach pre-loss operational levels.
4. Complex supply chain and equipment replacement
- Specialized equipment may have long lead times for replacement.
- Businesses that rely on global supply chains (e.g., manufacturers) may face lengthy disruptions due to materials, parts and labour shortages.
5. Industry-specific recovery needs
- Certain industries, such as hospitality, retail, and healthcare, may experience prolonged business recovery periods due to regulatory requirements and licensing processes.
- Industries that rely on custom machinery (i.e., technology, manufacturing, etc.) often take longer to restart due to intricate production lines.
6. Avoiding gaps in financial support
- If a business has a 12-month indemnity period but returning to full operational capacity is taking 18 to 24 months, they might run out of coverage before they are financially stable.
- This could result in financial distress, loan defaults or even permanent closure.
How long of an indemnity period does my business need?
Any business with complex operations, high capital investment, or dependence on specialized supply chains should consider extending their indemnity period beyond 12 months to ensure they have adequate financial support for a full recovery. Where possible, we recommend an indemnity period of between 24 to 36 months.
Connect with an Acera Insurance advisor to discuss these insights further and to develop a proactive strategy that will help to safeguard your business and support your goals in the coming year.
Mark Lee is Director, Commercial Client Care for the BC and Yukon offices of Acera Insurance. He brings more than 30 years of experience developing and structuring large, complex insurance and risk management programs, specializing in the manufacturing and technology sectors. Mark is a former board member of Canadian Manufacturers and Exporters BC and an active member of the Manufacturing Safety Alliance of BC.
Connect with Mark at mark.lee@acera.ca or 604.484.4999.