Business Interruption Insurance Explained

Business interruption insurance is a crucial form of cover that protects your company from the financial fallout of an unexpected event that stops you from trading as normal. It’s designed to help your business recover to the same financial position it was in before the disruption occurred. Sometimes called ‘business continuity insurance’, it isn’t a standalone policy. Instead, it’s typically sold as an essential add-on to a commercial property insurance policy.

When a disaster like a fire or flood damages your premises, your commercial property insurance pays to repair or replace the physical assets. Business interruption insurance works alongside it to cover the income you lose and the ongoing costs you still have to pay whilst your business gets back on its feet.

How Does It Work with Property Insurance?

The relationship between property and business interruption insurance is fundamental. Most business interruption policies include a ‘material damage proviso’. This means that for your business interruption cover to be triggered, you must first have a successful claim for physical damage under your main commercial property policy. In short, the property policy pays for the bricks and mortar, and the interruption policy covers the trading losses that result. For more on this, see our Essential Guide to Commercial Property Insurance.

What Does Business Interruption Insurance Cover?

Whilst the specifics can vary between insurers, a typical policy is designed to cover the essential financial shortfalls that occur when your operations are halted. The main areas of cover usually include:

• Loss of Gross Profit: This is the core of the policy. It replaces the income your business would have earned if the event hadn’t happened, calculated as the shortfall in your turnover less any savings you make on variable costs.

• Fixed Costs: It covers the ongoing expenses you’re obliged to pay even when you can’t trade, such as rent, business rates, utility bills, and employee salaries.

• Increased Cost of Working: This covers the reasonable extra expenses you incur to keep the business running and minimise losses. Examples include renting temporary premises, hiring alternative equipment, or outsourcing work to a third party.

• Accountant’s Fees: The policy may also cover the professional fees for an accountant to prepare and quantify the details of your business interruption claim.

What Is an Indemnity Period?

The indemnity period is one of the most critical choices you’ll make when setting up your policy. It is the maximum length of time the insurer will pay out for the financial losses you suffer, starting from the date of the incident. Insurers commonly offer periods of 12, 24, or 36 months.

It is vital to choose an indemnity period that gives your business enough time to recover fully. This isn’t just about how long it takes to repair your building; it’s about the time needed to replace specialist equipment, restock, win back your customer base, and return to your pre-disruption trading level. Many business owners underestimate this, and experts often caution that a standard 12-month period is not long enough for a complete recovery.

Common Exclusions and Extensions

No insurance policy covers everything, and it’s important to understand what is and isn’t included before you need to make a claim. You can often broaden your protection by adding extensions to a standard policy.

Common Exclusions

• Events without physical damage: As mentioned, standard policies require physical property damage to trigger a claim.

• Pandemics and communicable diseases: Following the COVID-19 pandemic, most policies now explicitly exclude losses from such events. The position for older policies was clarified by a Financial Conduct Authority (FCA) test case, which found that some specific ‘non-damage’ clauses could provide cover.

• Terrorism: Losses from acts of terrorism are excluded and require a separate, specialist terrorism insurance policy.

• Cyber-attacks: Disruption caused by a cyber-attack is not covered by a standard business interruption policy. You will need a dedicated policy for this, as explained in our Guide to Cyber Insurance for Small Businesses.

• Utility failures: Interruption from the failure of your public electricity, gas, or water supply is often excluded from basic cover.

Common Extensions

• Denial of Access (Non-Damage): This extension can provide cover if you can’t access your premises due to an incident nearby - for example, a police cordon - even if your own property is untouched.

• Suppliers and Customers: This covers your financial losses if a key supplier or customer suffers physical damage at their premises, which then disrupts your business.

• Public Utilities: An extension can be added to cover losses resulting from the failure of essential public services like electricity, gas, water, or telecommunications.

• Notifiable Diseases: Some policies offer an extension to cover interruption caused by the outbreak of a specified list of notifiable diseases at or near your business premises.

How to Calculate the Right Level of Cover

To ensure your policy can do its job, you must be careful to select the right sum insured and indemnity period. Getting this wrong can lead to underinsurance, meaning your final payout might not be enough to see you through the crisis.

The sum insured should be based on your business’s gross profit, not its total turnover. Look at your financial records from previous years and make realistic projections for the future, accounting for potential growth and inflation. Remember to include all the ongoing costs you would need the policy to cover, such as wages and rent. The indemnity period, as discussed, should reflect a realistic worst-case scenario for how long it would take your business to recover its market position, not just to reopen its doors.

Underinsurance is a widespread problem. A report from the Chartered Institute of Loss Adjusters (CILA) found that around 40% of business interruption policies were underinsured. Insurer Aviva has estimated that the figure for UK businesses could be as high as 50%.

Getting the Right Protection

Business interruption insurance is more than just a policy; it’s a core part of your business’s resilience strategy. An unexpected disaster can threaten the survival of even a healthy company, and this cover provides a financial lifeline during the difficult recovery period. By taking the time to accurately calculate your gross profit and realistically assess your required indemnity period, you can ensure your business has the robust protection it needs to weather the storm and trade another day.