Business interruption insurance can be the make or break between a company surviving or folding following a serious incident (such as a break-in, a fire, or a flood) that causes a business to shut down or operate at a reduced capacity.
Many business owners mistakenly think that other forms of insurance, such as business contents insurance or buildings insurance, will cover them for lost earnings resulting from an incident. However, while these types of policy can cover the immediate, physical damages, many policies do not include your loss of income resulting from an incident.
That’s where business interruption insurance steps in. This cover aims to ensure your company can stay afloat if it’s unable to trade or continue business after a major incident happens that prevents business from carrying on. It can serve as financial cover for the time that your company is out of action.
This guide will take you through the ins and outs of business interruption insurance via the following sections:
- What is business interruption insurance?
- What does business interruption insurance cover?
- Do I need business interruption insurance?
- How much cover do I need?
- How much does business interruption insurance cost?
- How to find a business interruption insurance provider
- Coronavirus and business interruption insurance
- Final thoughts & FAQs.
What is business interruption insurance?
Business interruption insurance (sometimes known as business income insurance), is designed to maintain your business’ trading position when disaster strikes, such as damage to your premises or fire, storm or flood.
While your other insurance policies will cover the material damage, business interruption insurance aims to pay out and cover the loss of income that your business has suffered following a disaster..
Most business owners choose to add business interruption insurance to their existing business insurance policies, such as buildings or contents, or as part of a comprehensive business owner’s package policy. However, it is possible to take out a standalone business interruption insurance policy.
What does business interruption insurance cover?
Business interruption insurance covers financial losses incurred following a disaster as well as any finances needed to put your business back to where it was before the incident happened.
Business interruption insurance can cover loss of income following a broad range of events. The two most common events leading to claims on this kind of policy are fires and floods. Following an insured event, business interruption insurance can recover a business’ financial losses. The cover typically include:
- any shortfall in profits
- reimbursement of any extra expenses of running your business as a result of the event, such as additional accountants’ fees
- fixed costs – any operating costs still being incurred by the property, even if you cannot trade in it
- temporary location – some policies cover the extra expenses of moving to and operating from a temporary new site, although this may come under a buildings insurance policy
- closure by a civil authority – if the government obliges a business to close the premises, business interruption insurance can cover the loss of revenue incurred.
On top of these standard cover features offered by most providers, some insurance companies provide additional cover for an increased price. Most standard policies only cover losses incurred directly as a result of damage at the insured company’s premises, and not those at third party premises, such as at a supplier’s site. Therefore, typical cover extensions include:
- losses resulting from damage at a supplier’s premises
- losses occurring from damage at the premises of specific customers. You may have to name the customers you want to be included in this feature on your policy when you take it out, and limits may apply to each customer based on the amount of turnover for which you depend on them
- losses which are the result of damage to your assets while in transit
- losses resulting from restricted access or lack of access to your premises
- losses from damage at the premises of a public utility.
Many of these extensions come with cover limits determined by the insurance provider.
Are there any key exclusions?
As with any cover, there are limitations to business interruption insurance. For instance, if you choose to add business interruption insurance to a commercial property policy, you will only have cover for the events laid out in the primary policy. If the property insurance policy excludes flood damage, then the business owner will be unable to recover any loss of earnings related to business interruption following a flood. Typical exclusions from a business interruption policy are:
- war risks
- riot or civil commotion
- pollution or contamination.
You may be able to secure cover for these excluded items if you pay extra for your premium. If you think any of these might be relevant to your business, it is worth discussing your options with an insurance provider or a broker to find appropriate cover.
Do I need business interruption insurance?
All in all, it comes down to whether substantial damage to the company, commercial property or assets would affect ability to trade and put the business at serious risk.
A whole host of businesses, entrepreneurs and self-employed people choose to take out business interruption insurance, however in some cases it is an unnecessary expense.
For example, if a writer works as a sole trader using just a laptop and internet connection, it wouldn’t be too difficult to find a replacement laptop or space to work temporarily. In this case, the cost of business interruption insurance might outway just replacing the equipment.
There are also many cases where it is advisable to have business interruption insurance. For instance, a large business holding large amounts of stock or equipment, with hundreds of employees to pay, could face bankruptcy if the business was unable to trade for several months following a warehouse fire. Business interruption insurance could save a company like this from folding due to lost profits and increased costs to bring the company’s revenue back up. For this specific instance it would also be worthwhile having a stock insurance policy in place.
What are the top causes of business interruption?
Internationally, some of the principal causes of interruption for a business are fire and explosion, a storm, breakdown in machinery, faulty design, material or manufacturing, strikes, riots, vandalism, floods, collapse, human error and power interruption.
Most business interruption insurance providers can insure a range of events, particularly damage caused by fire, storm, flood or the breakdown of essential equipment. Some policies can also cover employees being unable to access the premises as well as damage occurring at a supplier’s premises. That said, be sure to check with your provider for an accurate summary of events covered by your specific policy.
How much cover do I need?
How much cover you need will depend on the size of your business and your annual turnover, among other factors. A general rule of thumb is to take your business’ gross earnings and projections to estimate future profits. Don’t underestimate – it might bring down your premiums, but you will be left to pay the extra expenses if your business interruption costs exceed the coverage limit you gave to the insurer.
You also need to consider the indemnity period. The business interruption indemnity period refers to the period during which the business has cover, and during which the policy can pay out for a business’ loss of earnings. The maximum indemnity period is the amount of time that the insurer will cover business interruption losses, starting from the date the incident occurred.
The typical indemnity period is either 12, 24 or 36 months long. When choosing an indemnity period, you ought to consider the maximum amount of time it could take for your business to be able to trade again independently. This time should take into account:
- how long it would take to rebuild damaged buildings
- how long it would take to replace all lost stock and equipment.
If in doubt, the longer the indemnity period, the better. If you leave yourself short, your business may still crumble some time after the disaster, despite having business interruption insurance in place.
Does business interruption insurance cover wages?
Most policies cover employee wages. This coverage is essential if a business wants to retain its valuable employees while a company isn’t trading. Without this, companies may have to make their staff redundant, and may not be able to hire the same staff once business picks up again.
How much does business interruption insurance cost?
The price you pay will depend on multiple factors, including:
- which industry you operate in
- the number of employees you have
- the amount of coverage you opt for
- any prior claims you have made.
Location may also factor into the price. If your business operates in an area with increased risk of fire (i.e. industrial estate), your premiums may be more. A factory might have higher premiums than an office, too, for example, owing to the increased risk of equipment failure or a fire. It’s also simpler and less costly to move an office into a temporary location than it is to find a temporary property in which a factory can operate, which would also factor into the price.
How is business interruption insurance calculated?
Many insurers or brokers will help a company calculate the level of business interruption insurance they need. This calculation estimates the time necessary to restore a business following a disaster in order to set the length of the indemnity period.
Based on this indemnity period estimation, projections of the expected gross revenues of the business over this indemnity period are made using the company’s past 12 to 24 months of fees and sales. This figure is used to work out the company’s expected gross profits over the indemnity period. Other factors considered in the equation are the costs of a business moving to and operating from a temporary location and the expected payroll for staff who will not be employed during the indemnity period. These factors are added together. Any likely saved expenses during the indemnity period are then deducted, which provides the general advised sum insured for your business interruption.
How to find a business interruption insurance provider
Business interruption insurance is an often overlooked, but critical, type of commercial insurance. Business owners are likely to have some sort of buildings or contents insurance policy in place. In this case, business interruption insurance is typically added to these existing existing policys. Alternatively, you may look for a separate policy. Either way, there are several routes you can take to find the right insurance policy for you.
Approaching insurers directly
The most obvious route, of course, is to approach insurers directly. Many insurance providers advertise their commercial insurance online and can offer you an online quote if you answer a few simple questions.
Some insurers may give you the option to add business interruption insurance to your other policies when you purchase those. If you’re unsure of the level of cover that you need or whether to opt for a standalone or package policy, you can speak to the provider’s advisers.
Going through a broker
Insurance brokers are particularly helpful for commercial clients. Businesses have very different needs specific to their industry type, business model and size.
Brokers can help you build bespoke policies that provide tailored cover suited to your particular company. They have both industry experience and expertise and can help you understand all the terms in a policy so that you know what cover you have, for what events. What’s more, they usually have access to cheaper and more comprehensive deals than customers who approach insurers directly, saving you money, too.
A helpful place to begin your market research is on a comparison website. You can filter your search results by the level of cover you need, the price, or even the insurer. These kinds of sites allow you to compare the features of a business interruption insurance policy side by side, enabling you to spot the best policy for you.
They can also show you the types of comprehensive package policies available, including the other types of coverage they provide.
Final thoughts & FAQs
While many companies wouldn’t leave their buildings or contents unprotected, they fail to consider the financial losses they might incur while waiting for their assets, contents or property to be repaired/usable (or while they’re unable to trade for other reasons). Businesses without BI insurance can find that a severe incident folds their business through loss of income, even when they have both buildings and contents insurance in place.
A business interruption insurance policy can prevent your company from suffering following an insured event. Not only can you receive financial support to cover your losses, but a good policy will support you in returning to the same trading position you were in before disaster struck.
Still have questions? Find answers to common questions on business interruption insurance, below.
What is the material damage proviso?
The material damage proviso is a condition in all business interruption policies which exists to minimise the amount of time that business will be interrupted.
It means that the policyholder must maintain an active material damage policy to protect their premises while they have a business interruption insurance policy, to ensure that the business has the funds to repair or replace damaged assets, speeding up the process to resuming trade. This clause protects the insurer by reducing the length of time that they have to pay out.
Is business interruption insurance tax-deductible?
Yes, business interruption insurance is tax-deductible. It usually counts as an allowable expense, meaning companies can deduct it when calculating their taxable profit. Be sure to seek advice from an accountant for financial queries.
Does business interruption insurance cover payroll?
Each provider will offer different policies with varying exclusions and inclusions. Generally, most business interruption insurance policies cover the cost of payroll while your business activities are interrupted. Most policies cover the cost of one year’s salary per employee.