In the insurance world, workers’ compensation claims have long been one of the biggest concerns for the manufacturing industry. According to the U.S. Department of Labor, approximately 4 percent of manufacturing workers experience some type of job-related injury or illness each year, which can yield high costs and productivity drains.
Fortunately, the recent increase in automation and the latest technological advancements could help to decrease the number of claims submitted by manufacturing workers. Although critics say that automation is a major contributor to job loss, in many job functions, these new technologies are making manufacturing much safer. Machines are now able to complete historically dangerous tasks that can cause serious injuries to human workers.
Because of this, manufacturers now utilize equipment made specifically for their operation or machines that are fabricated around the world. While safer and more productive, many come with high price tags and long lead time between placement of an order, delivery to the factory and installation. Although the risk of injury is decreasing, this trend has introduced a new business exposure: heavy reliance on custom equipment and machinery.
Many business owners believe that as long as they have adequate limits at the time of a property loss, they will have coverage. But, what they fail to factor in is the loss of income they will inevitably face during the period of restoration that is needed to get their business back up and running after a breakdown. A Property or Equipment Breakdown Policy may cover the cost of repairing or replacing a building or machine, but what coverage is in place for loss of income? In the new world of automated manufacturing, the biggest question remains: how long will it take you to repair or replace your machinery before you lose out to a competitor or run out of operating funds?
Traditionally, relocating employees to a temporary facility and bringing on an additional shift was an easy solution for manufacturers after experiencing a loss. However, considering the development of automation, robotics and advanced manufacturing, getting a business back on track is now much more complex. Due to this changing landscape, understanding Business Interruption insurance coverage is critical for manufacturers in 2017.
Business Interruption Insurance Coverage and Its Importance
For the fifth year in a row, business interruption was ranked as a top worry for businesses in 2017 with 37 percent of respondents rating it as their biggest risk, according to an Allianz report. In order to insure against this type of risk, Business Interruption coverage must be built into a business’ Property Policy. Business Interruption coverage covers the loss of income (net income plus continuing operating expenses and payroll) that a business incurs due to necessary suspension or slowdown of operations. Additional Extra Expense Insurance is also available to help recoup any expenses above and beyond normal operating costs needed to continue operating after a loss.
Determining Limits for Business Interruption
No two companies, regardless of industry or size, are the same when it comes to proper limits. The following steps can be helpful in determining what Business Interruption Coverage is best for an organization:
- Calculate gross earnings: This is equivalent to sales minus the cost of goods sold.
- Calculate discontinued expenses: Certain costs will automatically cease if business operations are interrupted. This could include payroll expense, taxes, maintenance, utilities and more.
- Calculate longest potential timeframe of an interruption: The income should always cover the worst case scenario.
- Calculate extra expense: What would it cost to avoid interruption?
An insurance broker should work with carriers to provide a Business Interruption Worksheet to help determine the most realistic probable maximum loss to consider when deciding on appropriate limits.
For manufacturers who are determining their risk exposure, it is important to consider industry-specific factors, including the capacity of other manufacturing facilities and what automated work can be done manually as the interruption is being remedied. Business owners should also know what the timeline is for the restoration of tough to replace equipment or the lead time for shipment if the machinery is purchased internationally. And finally, manufacturers should always keep in mind key customer needs and how they can be addressed during the interruption in order to guarantee continued satisfaction.
For manufacturers – and for business owners across all sectors – there are many factors to consider when evaluating Business Interruption Insurance and extra expense coverage. Having these important conversations with your insurance broker upfront – prior to any potential loss – will help manufacturers be better prepared if the unexpected occurs.
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