What Is Business Interruption Insurance?
Some events are completely out of your control. And that applies just as much to your business as your personal life. But that doesn’t mean you can’t take steps to protect yourself. Business interruption insurance can help provide a lifeline in the event of a flood, fire or other disaster.
Floods, fires and all manner of other disasters can come out of nowhere. Just look at the Covid-19 pandemic.
Business interruption insurance is there to cushion the blow of such events. It can even help prevent your business from going under in the face of a true worst-case scenario.
Instead of covering compensation in relation to property damage, it deals with the medium- to long-term loss of income that arises from the property damage or disruption itself.
For example, if trading is brought to a halt due to a flood at your shop, a business interruption policy can act as a bridge until you are fully back on your feet.
To find out whether you need business interruption insurance, what it covers, and how it applies to Covid-19, read on below.
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Do I need business interruption insurance?
While there is no legal requirement to take out a business interruption policy, it is a form of insurance that should not be overlooked.
The main factors to be aware of when considering business interruption insurance are:
- whether or not you have a business premises
- whether any damage or disruption to that property, including any essential equipment it may contain, would cause a material loss of future income
- how quickly your business could recover from an unexpected event causing disruption
- whether your business premises are located in an area frequently affected by natural disasters, such as flooding or wildfires
So, for instance, if a fire or flood at your business premises would mean you could not trade for a significant period of time, you may want to take out business interruption insurance.
This is especially true for bricks and mortar retailers, which might have zero income if their premises were to close, or store large amounts of stock that would have a serious financial impact if stolen or damaged.
On the other hand, businesses that rely on an internet connection and little else – say a freelance writer working on a laptop, or a small business with employees who could work from home – may not necessarily require business interruption insurance.
What is covered by business interruption insurance?
Typically, a business interruption insurance policy would be designed to cover lost income and other expenses if your business premises, including essential equipment, is damaged or disrupted through fire, flood, wind, lightning, theft or falling objects.
Some policies will also include clauses to cover infectious diseases, such as coronavirus, as well as cover for people not being able to enter your business premises.
What is the indemnity period?
Arguably the most important part of your business interruption policy is its indemnity period. This is the maximum length of time your business interruption losses will be covered by the insurer.
It is vital that you realistically assess how long it would take your business to trade again after a disaster or disruption, to ensure your business interruption policy covers you for the appropriate amount of time. This includes any rebuilding or restoration that might be required, and replacing lost or damaged stock.
The standard time frame for the indemnity period is between 12 and 36 months.
Which costs are covered by business interruption insurance?
The costs that business interruption insurance will compensate you for will depend on the details of your policy. It can include, but is not limited to:
- Loss of gross profit and gross revenue the business would be earning if not for the disruption.
- Increased cost of working, such as renting a new, interim space or equipment.
- Ongoing operating costs, such as wages, rent or mortgage, taxes and utilities.
- Loan payments for loans taken out before the period of inactivity.
These costs will be covered for the length of the stated indemnity period.
What is not covered by business interruption insurance?
What business interruption insurance doesn’t cover, however, is the cost of damage to the property or equipment itself. For this you would instead need building and contents insurance, equipment insurance, or commercial property insurance.
What is contingent business interruption insurance?
There is another type of interruption insurance that applies if a prominent third party business you deal with, such as a major supplier or buyer, suffers a disruption that causes a loss of income for your own business. This is called contingent business interruption insurance.
It would cover the same kinds of costs and losses as standard business interruption insurance. However, you would need to make sure you list these business partners as dependent properties on your policy.
This could be your sole produce supplier if you own a restaurant (i.e. a contributing location), a client that makes up the majority of your income (i.e. a recipient location) or the factory that manufactures your products (i.e. a manufacturing location).
It could even be a third-party business that draws customers to the area that your business relies on, such as a shopping centre, football stadium or music venue. These are called leader locations.
Business interruption insurance and Covid-19
Since the emergence of Covid-19, there has been much discussion around how business interruption insurance applies to the challenges caused by the pandemic. This could be, for example, national or local lockdowns forcing businesses to shut or Covid-19 outbreaks causing the need to isolate.
A number of rejected claims led to an investigation by the Financial Conduct Authority (FCA) into the application of ‘non damage’ business interruption clauses to Covid-19-related closures. The High Court then ruled broadly in favour of policyholders, leading thousands to have their previously denied claims paid out.
The FCA has since created a policy checker so you can see whether or not your business interruption insurance will cover losses caused by Covid-19, by comparing it to the representative sample of test cases considered by the High Court.
If your policy does contain an infectious disease clause, you will either need to prove that Covid-19 is present within a certain radius of your business, or that it is at your premises. This is called the Relevant Policy Area (RPA).
The FCA has a calculator to help you find proof, but only if your policy covers Covid-19 within a certain distance from your business.
Other recommended forms of evidence include:
- Personal knowledge of Covid cases within your RPA (e.g. yourself, a member of staff or a customer).
- Media reports from reputable sources.
- NHS or Office for National Statistics (ONS) data on deaths due to Covid-19.
- Reported cases of Covid by local authorities.
How much is business interruption insurance?
Most of the time, business interruption insurance will be bundled together with other business insurance packages as an optional extra. However, it's worth checking your policy in detail to ensure you are covered. It is often added to policies dealing with business properties, such as building and contents insurance.
Before deciding on the scale of your business interruption policy, it is important to carefully assess the potential loss of income your business would suffer in the event of damage or disruption to its premises, a realistic recovery time, and the costs you are liable for during the inactive period, such as mortgages, rents, wages, utilities, loans and taxes.
The insurer will then also take into consideration the risks associated with your industry, the location of your business premises, and any previous claims made.
All of these factors will help inform the level of coverage you need to take out and the cost of your overall premium.
Given the complexity of business interruption insurance policies, you may want to look into using an insurance broker, to ensure you get the right level of coverage.
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Connor is a writer and spokesperson for NerdWallet. Previously at Spreadex, his market commentary has been quoted in the likes of the BBC, The Guardian, Evening Standard, Reuters and The Independent. Read more