Fire insurance for warehouses

Question: The recent fire in Al Quoz has alerted our company to the dangers fires pose to businesses dependent on warehouses. We have a large storage facility on site, and are concerned that we may not be properly protected. What process should I go through to ensure that we are covered in terms of assets, employees and business interruption?

Answer: Not enough people realise that under-insurance is as big a problem in this market as no insurance. Incidents such as the fire last week reminded people of the importance of having insurance in place, but there's still a tendency for companies to significantly undervalue their requirements.

Obviously, insurance is initially an expense, and all businesses look to minimise expenses. However, companies who look to keep the size of the premium to a minimum often find themselves facing significant problems down the road.

One of the big problems is that people tend to look at the "book value" of their assets alone when determining how much insurance they need. If a fire destroys a piece of machinery, what is the cost of the machine?

Adding the original cost of each asset together is used as the rough equation to cover the total insurance required.

This ensures a cheaper premium, but the problem is that prices rise, so that the cost of replacing an essential part is much higher in real terms than you've accounted for.

In addition, the process of replacing the part will require technical expertise - again, an additional expense. Finally, the cost of business interruption - the time spent when you physically can't sell to customers, the overall disruption to your company - is likely to be a higher overall cost than the cost of replacing the assets.

So, as well as calculating the real value of the assets and the support you will need to replace them, you should also factor in the cost of lost earnings over time. Typically, this is calculated as the reduction in "gross earnings," less "expenses which do not necessarily continue." In other words, how much money would you have taken in under normal circumstances, factoring in costs you are not incurring while your business is not operational?

There are now policies available which provide cover in these instances. The so-called "Property All Risks" cover provides for loss or accidental damage to your premises and property under a single limit, including stock, machinery, furniture and fixtures. In addition, policies which include Business Interruption cover will provide for any loss of profits and additional costs.

Insurance companies providing business interruption cover typically provide companies with policies based on sales that would have occurred, not sales that could have occurred, so you will need to have realistic sales and profit projections.

It is worth bringing in a trained insurance professional to discuss how much insurance you need.

- The writer is Director of General Insurance at Nexus, one of the region's leading financial advisor. The views expressed here are the author's own and do not necessarily reflect the views of Gulf News. If you have any questions, please email us at : advice@gulfnews.com