What is business interruption?
Trying to keep your business going is hard enough without it being derailed by factors outside your control. Sadly, some never recover from disruption with 25% estimated to close for good following a serious fire.
It’s not just natural events like flooding that cause firms to shut down, even though figures reveal more than one quarter are affected by flood risk.
The good news is that a combination of disaster recovery planning and business interruption insurance can help cover potential losses, and see you through the worst; here’s how it works.
- What is business interruption insurance?
- What does business interruption insurance cover?
- How does business interruption insurance work?
- Who needs business interruption insurance?
- What qualifies as a business interruption?
- How much does business interruption insurance cost?
- Business insurance help and advice
- Business interruption insurance FAQs
What is business interruption insurance?
Business interruption insurance covers loss of income if your business cannot operate because of unexpected events.
Policies provide financial support to get your business back on its feet and in the same position it was in before it suffered the loss.
What does business interruption insurance cover?
The specific events covered will depend on the terms set out by your insurer, but common business interruption risks covered include:
- Fire
- Flood
- Escape of water
- Theft
Business interruption can help cover the cost of wages, replacement machinery, and temporary premises. Some policies may also cover you if your business is affected by interruption to a client or supplier.
What isn’t covered by business interruption insurance?
Exclusions are events not covered by your policy. They’re set by each insurer so they can vary across providers. That said, you usually won’t be able to claim for:
- War-related loss or damage;
- Interruption due to nuclear incidents;
- Interruption due to pandemics, viruses, or diseases;
- Compensation if your income is unaffected or if there are no increase in costs;
- Standard trade risks which lead to lost income.
How does business interruption insurance work?
If your business suffers losses because of an insured event covered in your policy (such as commercial flood damage), you should contact your insurer. Most policies are bought in addition to business insurance (which covers your premises and contents), rather than standalone.
If your claim is successful, your insurer will compensate you for lost income and any additional costs incurred (depending on your policy terms).
A loss adjuster may visit to assess the situation and calculate your losses. If that’s the case, your insurer will generally let you know what they need to see.
When can I make a claim?
In most cases you won’t be able to make a claim immediately after the event has occurred. Instead, you’ll need to allow for the ‘waiting period’ to pass before your insurer will start paying out.
You would normally receive interim payments from your insurer throughout the indemnity period while your claim is being investigated and losses calculated.
What is the average clause in business interruption insurance?
Underinsurance happens when the sum insured on your policy doesn’t reflect the actual gross profit or income and, therefore, isn’t enough to cover your losses. In this situation, the payout you receive will be reduced to reflect the percentage you’re underinsured by.
For example, your business is affected by an insured event, and you want to claim for lost income while repairs are carried out. The sum insured on your policy is £100,000 but you’ve underestimated, and the losses are double this, £200,000.
This means you’re underinsured by 50%. If your insurer uses the average clause (also called the condition of average) then your payout will also be reduced by 50%. This means you’ll only receive £50,000 if you claim the maximum £100,000.
The average clause also applies even if you don’t claim the maximum sum insured. For example, if you made a claim for £50,000, your payout would be £25,000.
When taking out a business interruption policy, you must make sure the sum insured and limits on the policy accurately reflect potential future earnings to avoid being underinsured.
What is a business interruption indemnity period?
The business interruption indemnity period is the length of time your insurer will cover your lost income. It’s officially termed the ‘maximum indemnity period’ or MIP for short.
Indemnity periods vary, usually for a minimum of 12 months, up to 24 or 36 months, although some insurers will cover you for longer.
When you choose an indemnity period, you’ll need to think about how long it would take your business to get back up and running in different scenarios.
For example, you buy a business interruption policy with a 12 month indemnity period. Your business premises is flooded, and you make a claim on your policy. Your insurer pays out for loss of income that helps you cover wage bills and funds a temporary premises so that you can continue to trade.
By the time new machinery is delivered and back to full production, along with recovering lost sales, this could be a lot longer than 12 months. However, your insurer will only pay to the length of indemnity period, in this example 12 months.
With this in mind, it’s vital to accurately estimate what a reasonable indemnity period might look like for your business. It’s something to consider as part of your disaster recovery strategy and business continuity plan.
What are variable costs in business interruption?
Variable costs are expenses that change, usually depending on your productivity. This can include the cost of materials and freight.
In contrast, fixed costs are expenses that must be paid and generally don’t fluctuate, for example, rent.
Who needs business interruption insurance?
Business interruption insurance isn’t something you need by law, but without it, it would be down to you to cover costs if an insured event stopped you trading as normal.
Policies can be particularly effective when you also have a comprehensive business continuity plan that sets out clear steps to manage disasters and emergencies. Adding other insurance products that reflect your business activities, such as cyber insurance, provides extra peace of mind and support.
What qualifies as a business interruption?
Your policy will set this out in writing, but broadly, your business will be covered for insured perils (fire, flood etc) that cause an interruption to your business which you suffer a loss from. This could include a fire, damage caused by someone breaking in, or a burst pipe that floods your premises.
How much does business interruption insurance cost?
Business interruption insurance is generally tailored to reflect your business. When it comes to calculating your premium, insurers will consider various factors, for example:
- The nature of your business
- Whether you own any premises
- How many employees you have
- The indemnity period you choose
- Your income and expenses
Business insurance help and advice
As a leading independent insurance broker, Alan Boswell Group is well placed to offer you and your business tailored advice.
Our experienced commercial risk management team can support you with all aspects of business risk. This includes how to set up a business continuity plan and advice on how to tackle some of the most common causes of business interruption. To find out more, speak to one of our experts on 01603 218000.
Business interruption insurance FAQs
Does business interruption insurance cover loss of rent?
If you’re a commercial landlord, you can extend your landlord insurance to include business interruption. This would cover your loss of rent if the property cannot be used due to an insured event, and alternative premises for your tenant.
Your commercial tenant should have their own business interruption insurance to fund their own operations.
Is business interruption insurance applicable to landlords?
Commercial landlords can add business interruption to their existing business insurance policy. This covers the premises you own but your tenant will need to claim on their own insurance if they need compensation to continue their business activities.
Residential landlords who rent to private tenants can consider loss of rent cover. This compensates you if your property is damaged by an insured event (such as fire or flood). Your policy should cover any lost rental payments and costs if your tenancy contract says you need to provide alternative accommodation.
Is there a waiting period for business interruption insurance once you’ve taken out a policy?
Yes, most policies will have a waiting period. This is the length of time between taking out a policy and being able to claim (often between one and three days).
Does business interruption insurance cover payroll / wages?
Yes, business interruption insurance should cover staff wages.
Does business interruption insurance cover strikes?
No, business interruption insurance doesn’t normally cover losses due to strikes. If you’re concerned about the impact of strike action on your business, speak to your broker or insurer about what your current policies cover and what your options are.
