The unexpected happens every day, and it’s impossible to mitigate every risk your business might encounter.
But what would you do, for example, if your business had to close temporarily due to flooding? Or the access route to your premises was cut off by roadworks?
Having a backup plan is crucial to handling these unforeseeable situations, and business interruption insurance could be key to helping you stay afloat while you get your business back on track.
Here’s a quick guide to business interruption insurance, what’s covered and how it could benefit your business.
Business interruption insurance definition
Business interruption insurance (also known as ‘business continuity insurance’ or ‘business disruption insurance) provides cover for loss of income - or the additional costs of keeping your business running - following an incident that interrupts your normal activities.
The purpose of this cover is to safeguard your organisation against the potential financial losses and/or additional costs you could incur if your ability to operate is affected by an unforeseen event, such as a fire, flood or electrical failure.
Although policies may vary, business interruption insurance will usually provide cover against losses following (and in consequence of) material damage to your property at a specified location. However, in extreme cases business interruption insurance will also provide cover if a civil authority shuts down a business due to physical damage to a nearby location.
How does business interruption insurance work?
There are three main factors taken into consideration when an insurer calculates the value of a business interruption insurance claim:
- Indemnity period – this is the length of time that will be covered under the policy, with typical indemnity periods lasting for 12, 24 or 36 months. When choosing your indemnity period, it’s a good idea to select the worst case scenario based on how long it would take to get your business back up and running, including retraining staff if required and whether there are any other factors that could increase your company’s recovery time - such as replacing specialist equipment and machinery.
- Gross profit – this is the maximum amount to be insured, and you’ll need to declare your expected gross profit for the coming year when you take out the policy. Claims will often be paid on a ‘declaration linked’ basis – which means your insurer may apply an uplift on your expected gross profit to take into account any future growth in turnover.
- Additional expenses – You may also incur other expenses as a result of closing your business, such as additional accountant’s fees or costs to hire an alternative premises while repairs are carried out. These can also be covered under business interruption insurance, however payments under this section of the policy will be offset against any payments made for loss of income.
Sometimes it helps to put things into context, so read on for an example of a typical business interruption insurance claim.
If you already have business interruption in place, use the FCA business interruption insurance policy checker to find out if your insurance policy may cover business interruption losses caused by COVID-19.
Business interruption insurance example
Tom runs a business restoring and selling antique furniture. An employee accidentally leaves a piece of equipment running overnight, setting fire to the property and causing extensive damage to the workshop (which contains a lot of specialist equipment). The fire safety officer deems the property unsafe for customers and employees, so Tom has to stop all business operations while repairs are completed, resulting in a loss of income.
Luckily, Tom has business interruption insurance in place, and immediately notifies his insurer to make a claim.*
Tom’s insurer reviews the details of the interruption and makes an interim payment for loss of revenue, allowing Tom to continue to pay ongoing business expenses (such as wage role and utilities) while the property undergoes repairs and specialist equipment is replaced.
A few weeks down the line and repairs to the property are taking longer than expected, so Tom decides to rent an alternative premises to maintain his business income. His insurer agrees to cover these additional expenses, offsetting the amount against loss of income payments being made as part of the claim.
*He also notifies his buildings and contents insurance provider, as the physical damage to the property won’t be covered under the business continuity insurance policy. Tom thinks to himself it might be worth switching over to a combined commercial insurance policy at renewal to save some time and money.
Common business interruption insurance exclusions
There are also some key risks that are usually not covered by business interruption insurance, so it’s important to familiarise yourself with the exclusions of your policy.
The following scenarios will usually be excluded:
- Communicable diseases (illnesses caused by viruses or bacteria spread through contact with contaminated surfaces, bodily fluids, blood products, insect bites, or air transmission) – i.e., pandemics
- Acts of terrorism (usually not including bomb threats)
- Cover is also usually not provided if your organisation’s activity have discontinued permanently or a liquidator is appointed.
What’s the average cost of business interruption insurance?
The cost of business interruption insurance can vary widely depending on a number of factors relating to your business, such as:
- The type of business
- How you provide services – i.e. via a business premises, online or at events
- Number of employees
- Your selected indemnity period
- Your expected gross profit for the forthcoming year
Who needs business interruption insurance?
Business interruption insurance isn’t a legal requirement – which means that individual directors and trustees usually bear the responsibility of deciding whether to take out cover for their organisation.
Essentially, if your organisation’s activities could be heavily impacted by an unexpected event, then you may want to take steps to your protect your income - and by extension your employees, volunteers, customers and clients.
When deciding whether you need cover, you should also consider elements of your business that could impact the speed with which you can get back to normal following a disruption – such as having to source specialist equipment or renovate a large premises.
Although it may be called ‘business interruption insurance,’ a range of organisations can benefit - here are a few examples of the type of customer Endsleigh works with:
- SME and large businesses
- Fleets and courier services
- Motor trade
- Charities, not-for-profit organisations and community groups
- Sports associations
- Leisure trusts
- Education establishments, such as students’ unions, student accommodation providers and independent schools
- Travel agents and tour operators
Business interruption insurance with Endsleigh
Having an insurance partner who understands your needs is essential in finding the right cover. With thousands of commercial partners across the UK and over 30 years’ experience providing insurance for the commercial sector, our team of experts are dedicated to finding the right cover for your organisation.