What is Business Interruption Insurance?
Business interruption (BI) insurance protects your business income when an insured event prevents you from trading normally. While property insurance covers physical damage, BI insurance covers the financial consequences of that damage - the lost profits and ongoing costs you still need to pay.
Why is Business Interruption Insurance Important?
Many businesses underestimate how long recovery takes after a major incident. Consider:
- A fire might take 6-12 months to fully recover from
- Flood damage can require extensive drying and restoration
- Supply chain disruptions can last months
- Customer relationships may need rebuilding
Without BI cover, you would need to fund ongoing costs from reserves while generating little or no income.
What Does Business Interruption Cover?
BI insurance typically covers:
Loss of Gross Profit
The reduction in turnover minus any savings in variable costs.
Increased Cost of Working
Additional expenses incurred to minimise the interruption, such as temporary premises or equipment hire.
Wages and Salaries
Ongoing payroll costs for employees you want to retain during the interruption.
Standing Charges
Fixed costs that continue regardless of trading, such as rent, rates, and loan repayments.
Key Policy Features
Understanding these terms is essential:
Indemnity Period
The maximum time the policy will pay out - typically 12, 24, or 36 months. Choose a period that reflects realistic recovery time.
Sum Insured
Usually calculated as gross profit multiplied by the indemnity period, plus any increased costs of working.
Deferment Period
Some policies have a waiting period before cover begins, reducing premiums but increasing your exposure.
Calculating Adequate Cover
Getting the sum insured right is crucial:
- Gross Profit Calculation - Turnover minus variable costs (not accounting profit)
- Indemnity Period Selection - Consider worst-case recovery scenarios
- Increased Costs Allowance - Budget for temporary solutions
- Wage Roll Decisions - Which staff would you retain during a prolonged closure?
Common Extensions
Many BI policies offer additional covers:
Suppliers Extension
Cover for interruption caused by damage at your suppliers' premises.
Customers Extension
Protection if damage at a major customer's premises affects your income.
Denial of Access
Cover when you cannot access your premises due to damage nearby.
Public Utilities
Protection against failure of electricity, gas, or water supplies.
Claims Considerations
BI claims can be complex. Key points include:
- Detailed records are essential for substantiating claims
- Loss adjusters will scrutinise your figures carefully
- The policy responds to insured perils only
- Mitigation efforts are expected and rewarded
Common Mistakes to Avoid
Businesses often make these errors with BI insurance:
- Underestimating the indemnity period needed
- Confusing gross profit with net profit
- Failing to update sums insured as the business grows
- Not understanding policy triggers and exclusions
Working with a Specialist Broker
A specialist broker can help you:
- Calculate appropriate sums insured
- Select the right indemnity period
- Understand policy terms and conditions
- Navigate the claims process if needed
Next Steps
If you need business interruption insurance or want to review your existing cover, contact our team. We can help ensure your business income is properly protected.
This article is for general information only and does not constitute advice. Please contact us to discuss your specific requirements.
