Business Interruption insurance is often misunderstood and therefore overlooked by businesses. This might be because they think the cover is already provided under their Buildings or Contents insurance, but it can be the cover that allows your business to continue trading in the event of a loss.
Where Buildings and Contents insurance will put right the physical damage caused by, for example, fire or storm damage, they make no provision for the financial loss your business will sustain as it recovers from the event – the interruption in trading. A Business Interruption policy will replace the income or profit lost during the interruption and could be the difference between you surviving the loss or not.
This article addresses the main areas of understanding and buying Business Interruption insurance.
If you have any questions about buying Business Interruption cover, get in touch https://www.biba.org.uk/find-insurance
What is Business Interruption insurance?
Business Interruption insurance covers you for loss of income during periods when you cannot carry out business as usual due to an unexpected event. Business Interruption insurance aims to put your business back in the same trading position it was in before the event occurred.
For example, if there was damage caused by a fire at your premises and you were unable to trade for months, even years, could you cover the cost of temporary premises and the additional costs of rehoming your business? Most businesses won’t have the cash reserves to survive this, but with the right Business Interruption program in place, you’d get help with everything from temporary premises to the lost profit.
What does Business Interruption insurance cover?
Business Interruption insurance covers you for the loss of income due to an unexpected (and insured) event preventing you from trading. An example could be a fire, flood, or storm or impact damage. Some policies will also cover Business Interruption because of customers not being able to get to your business premises or damage at the premises of a supplier or customer. We’ll explore these later.
Business Interruption insurance is often added onto a Commercial Property policy and isn’t often offered as a stand-alone cover because, in most cases, there must be a material damage claim for the Business Interruption cover to be triggered.
Why is Business Interruption insurance important?
In the event of a loss covered by your material damage policy, it will replace the buildings, contents, and stock but there is no provision made to cover the loss in profit while you are unable to trade. This is what a Business Interruption policy covers and why it is a critical cover for businesses.
For example, if there was a flood at your shop and your stock was damaged, your material damage policy would cover the cost of repairing the flood damage, drying out the shop, and replacing or re-ordering fixtures, fittings, and stock. This could take weeks or months depending on the work involved and lead-in times and availability for stock. During this time you have ongoing costs, like wages and rent.
What are the different types of Business Interruption cover?
There are two main types of Business Interruption cover as follows:
Gross Profit Basis
At its most basic level, this cover will provide cover for any loss of gross profit due to your business being unable to trade due to an insured loss.
The sum insured for this cover is based on your company’s estimated gross profit for the next year.
For insurance purposes, the gross profit should be calculated as:
Uninsured Working Expenses are any cost that will reduce or be eliminated if the business is no longer operational and can include:
– Purchase of Raw Materials
– Utility Bills
– Transportation Costs
It is important to note that an accountant’s gross profit is different from insurance gross profit and using the accountant’s gross profit can lead to the application of Average (reducing any claim settlement in proportion to the underinsurance).
Your gross profit amount should include your full wage roll as you are likely to still be legally liable to pay the wages of your employees even if your business cannot trade.
Increased Cost of Working
This cover might be more suitable if your business can, theoretically, trade from anywhere. Increased Cost of Working cover will provide a pot of funds to pay any costs associated with getting your business back up and running, such as finding new premises, sourcing new equipment, or obtaining new stock.
Increased Cost of Working cover has an economic limit. This means that insurers will not release the funds unless you can demonstrate that by paying out this money your business will either save money or make money.
There is also a cover called Additional Increased Cost of Working which does not carry this condition.
What does Business Interruption insurance not cover?
Insurance policies are contracts and each one will set out what is included in the cover and a list of exclusions, here are some of the more common risks excluded on a business interruption policy.
- Communicable diseases i.e., pandemic
- War & terrorism
- Riot & civil commotion
- Pollution or contamination
Each policy will vary, and we will always set out the policy exclusion to you before the cover is arranged.
Do I need Business Interruption insurance?
Business Interruption can be a complex cover and is often left out of insurance portfolios, particularly by new ventures.
It is an important cover for new ventures as it can potentially save your business in the event of a major claim, such as a fire or flood.
How much Business Interruption insurance do I need?
A Business Interruption policy should be an essential part of your insurance program. The impact of a loss on your ability to trade is not to be understated. Your recovery from that loss could depend on your Business Interruption insurance. You will need enough cover to fit your unique set of circumstances and you should select the appropriate indemnity period to allow you to make a full recovery. Using the calculations set out in this guide and advice from your insurance broker, we can help you get the right level of cover.
What is an indemnity period on a Business Interruption policy?
The period of indemnity is the length of time the insurance company will make payments to cover the losses insured under the policy. On a Business Interruption policy this is usually 12, 24 or 36 months, although it can be longer. The indemnity period starts on the date of the loss and ends when the level of business income and the profit margin cease to be affected by that loss. The indemnity period may expire even if the total sum insured has not been reached.
How long should the indemnity period be on a Business Interruption policy?
When selecting the indemnity period, you need to consider the maximum amount of time it would take for your business to be able to trade again, considering factors such as how long it would take to rebuild and refit premises and replace lost stock and equipment. Therefore, it is better to have a longer indemnity period, rather than one which will expire before you are back up and running to the level you were immediately before the loss.
Having an inadequate indemnity period can jeopardise an organisation’s ability to fully recover following a loss.
How much does Business Interruption insurance cost?
The sum insured is chosen by you, typically in increments of £10,000.
You will also need to choose an appropriate indemnity period. An indemnity period is the length of time that a claim will be paid for and so this should be set at the amount of time you think it will take to get your business fully operational again.
When considering your indemnity period, you should consider the following:
– How long it will take to rebuild the premises, including debris removal, architects’ timescales, planning permission as well as the actual works
– If any of your machinery or stock has a long lead time
– How long it will take to win your customer base back if you can’t trade long-term
– Are you able to re-setup anywhere or will you need to wait for available premises in a particular area
With this information, your insurance broker will be able to advise on an indemnity period and obtain quotes for you based on the information provided.
How do I get a quote for Business Interruption insurance?
Business Interruption, in both forms, is generally available as part of a commercial package or combined insurance. Once you have selected your gross profit sum insured and indemnity period, your insurer (we) will be able to quote to include this for you. You cannot buy standalone business interruption insurance as there is a condition on a Business Interruption policy usually called a material damage proviso, which means that there must always be active material damage policies to protect the property in question. This is to ensure there are funds available to repair the premises and speed up the process of the business recovery.
Although misunderstood and sometimes overlooked, Business interruption insurance should be central to your insurance program, protecting the future of your business and your ability to fully recover following a loss. If you need help arranging business insurance, find your local Broker via: https://www.biba.org.uk/find-insurance