Business interruption insurance (aka business income insurance) covers lost income or extra working costs if a disaster leaves you unable to trade. As this can be a particularly confusing type of business insurance, here's some information on what's covered and what's not covered to help you decide if you need business interruption insurance.
- What is Business Interruption Insurance?
- What does Business Interruption Insurance cover?
- Who needs Business Interruption Insurance?
What is Business Interruption Insurance?
Business interruption insurance protects a business when a disaster affects its profitability, by reimbursing lost income or providing funds to keep the business operating (e.g., to relocate to temporary premises if your premises are damaged and unusable).
An unexpected disaster or crisis can mean lost income or extra expenses for a business as it copes to recover—and business interruption insurance (BI) can help financially in these cases. In essence, business interruption insurance is meant to help keep a business on its feet after a crisis, at a time when it might face severe financial difficulties because it is temporarily unable to trade. It's a popular type of business insurance, but there have been many disputes with BI insurance of late due to the COVID-19 lockdown.
Business Interruption Examples
- A warehouse business is flooded. Their buildings and contents insurance covered the building damage as well as the damaged inventory. Their business interruption insurance covered a move to a temporary warehouse while damage to their property was fixed, as well as coverage for a temporary drop in income during this time.
- A fire in a manufacturing plant damages key equipment, rendering the company unable to produce widgets. While waiting for replacement equipment to be delivered, the company suffered a significant loss of income that was covered by their business interruption insurance.
What does Business Interruption Insurance Cover?
Business interruption insurance can cover lost income and also extra expenses incurred while a business is coping with the aftermath of a disaster. Not only are income shortfalls covered (that is, the drop in turnover you experience because of the event) but BI insurance can also provide funds to help you return to an operating state.
What you can claim for:
- Reduction in turnover (i.e., an income shortfall)
- Higher working costs (e.g., funds to cover a move to a temporary location, repair or replace damaged equipment, etc.)
What types of events are typically covered by business interruption insurance? Usually, just physical damage. That is, coverage on SME policies typically extends to situation where a business is unable to trade due to physical damage at their premises, such as fire, flood, storm or even equipment breakdown.
- Essential equipment breakdown
What's Not Covered
Business interruption insurance does not cover all types of disasters that might temporarily shutter a company. For example, most plans won't cover viruses—the kind that affects computers (this can be covered by a good cyber insurance policy) or the kind that affects humans.
In fact, many businesses were blindsided when their COVID-19 business interruption claims were denied in 2020, but in many cases coverage simply did not extend to this type of calamity. As a result of this, in March 2020 the Financial Conduct Authority set out to obtain legal clarity on business interruption (BI) as it relates to coronavirus.
For example, some business interruption policies include a 'Material Damage Proviso' which means that claims are only considered if there was physical damage to the insured premises.
Here is some language taken from real business interruption policy wording documents so you can see how the fine print in the exclusions affect coverage in situations like COVID-19 claims:
"Prevention of access: Access to or use of the premises being prevented or hindered by any action of Government Police or Local Authority due to an emergency which could endanger human life or neighbouring property, excluding closure or restriction in the use of the premises due to the order or advice of the competent local authority as a result of an occurrence of an infectious disease (or the discovery of an organism resulting in or likely to result in the occurrence of an infectious disease)..."
Beyond this, individual terms and conditions mean there can be a long list of exclusions on a business interruption policy so it's a good idea to read the details for yourself before taking a policy, to make sure it offers the coverage you need.
Businesses will get this financial assistance for only a fixed period of time, called an indemnity period (e.g., 3 months, 6 months, 12 months, etc.). When choosing a policy, be sure to check the length of the indemnity period as a longer one will provide more time and money with which to get your business back up and running. It can take months for a business to recover from a disaster.
For example, recovering from a flood involves much more than just drying out your property. Consider some of the steps listed in government guidance on drying out flood-damaged buildings and you can imagine how long it could take before you're back in business after a flood:
- Health and Safety assessment
- Flood damage assessment
- Decontaminate building
- Dry building until appropriate moisture level reached
- Drying Certificate
- Sanitation Certificate
- Agree repair strategy with insurer
- Repair, re-fit, decorate building
Who Needs Business Interruption Insurance?
Business interruption insurance can be useful for any business that has fixed premises or equipment that are key to their operations—and if physical damage to these assets would lead to the business being unable to trade normally.
It can take weeks or months to recover from a disaster such as a fire or flood (the two most common claims under business interruption insurance) while assessments and repairs are made. Businesses that couldn't cope financially with that type of interruption should consider buying business interruption insurance.
Not every business needs BI insurance, however. If, for instance, you're a sole trading freelancer with no fixed business address and your only tool is your laptop, which is backed up on the cloud each night—you probably don't need business interruption insurance. If you're not sure whether or not you need it, talk to a specialist broker or insurer.
It depends on the terms of the policy. Many business interruption insurance policies only cover situations where there's physical damage to the premises and have an exclusion which means you aren't covered for lost income due to the coronavirus lockdown.
While business interruption insurance is one of the more complicated types of business insurance, it can most simply be explained as financial cover for lost income or extra working costs if your business is temporarily unable trade, usually due to physical damage in your premises.
While it will depend on the particular terms of your policy, business interruption insurance can cover rent of a temporary premises if yours is being repaired after physical damage such as fire, flood or storm.