What is business interruption insurance?

Business interruption insurance (BI) is designed to cover your business for loss of income as a result of not being able to continue trading following an insured event such as a fire, storm, flood, or major theft which affects your ability to trade.

In the event of such an unfortunate occurrence, it is important to consider how you would keep your business running in the interim period. How would you pay the bills, pay your staff and maintain relationships with clients and suppliers?

Cover is typically incorporated into a wider policy, such as a business combined liabilities insurance policy.

While Property Insurance will cover the reinstatement of your buildings, machinery and contents, it is BI that will help to minimise the financial impact of a disaster across the whole business. Therefore, it is important to get it right from the outset.

There are three key points to consider for a BI policy:

1. The indemnity period is crucial and should reflect a worst-case scenario and how long it would take for your business to return to the same trading level before the loss occurred.
2. The maximum sum that needs to be covered by the insurance.
3. The basis of cover to insure.

How are business interruption policies arranged?

The policies are usually arranged on either a gross profit basis or on a gross revenue basis, depending on the trade.

Gross profit basis is mainly used for manufacturing and retail.

Gross revenue is usually used to cover services and professional businesses.

Cover is usually limited to interruption following insured damage that has occurred at premises either owned or occupied by the insured.

Policy extensions can be added that amend premises limitation to include interruption caused by damage at premises used by the insured’s neighbours, customers, suppliers, utility providers and other third parties.

BI policies can also be extended to cover losses caused by events including disease outbreaks and bomb scares that affected the insured’s premises.

Explaining the key points in business interruption policies

What is the indemnity period? 

The indemnity period is defined as ‘the period beginning with the occurrence and ending not later than the maximum indemnity period thereafter, during which time the business is affected by the interruption occasioned by the damage’. This is the limited period for which insurers will pay for any losses incurred.

When deciding the maximum indemnity period, you’ll need to take into account the activities of the business:

• the time it will take to replace specialist machinery.
• the make-up of the company’s customers.
• other factors (external) that may have an impact on the speed of recovery.

What is increased cost of working only? 

Typically, this form of business interruption cover is suitable for office-based businesses or contractors whose income is generated from work away from their own premises. As such, an interruption from a fire at their own office, would not significantly impact their income or profit.

For these types of businesses, cover may be required for additional costs incurred to minimise the interruption to trading, including renting temporary office space or additional staffing costs.

What is gross profit?

Gross profit is a form of business interruption insurance that covers lost profit if an insurable event occurs and is typically insured by companies who undertake business activities at their own premises, key examples being manufacturers and retailers.

The amount of loss is calculated based on a pre-defined formula and relies on historical rates of turnover to determine the amount of money a business is losing.

Policy coverage extends throughout the period of time the insured rebuilds or repairs its business property and covers losses the business experiences while not being able to function as normal.

What other types of BI cover are there?

There are other forms of cover available which are tailored to the specific needs of different types of businesses, including:

• Additional increased cost of working.
• Gross revenue/fees/rentals cover.
• Engineering.
• Advanced profits.

Optional extensions to BI cover 

Although not available under all BI policies, a number of extensions to cover can be available to businesses who may be affected by damage to a third-party premises.

Common extensions to cover can include losses incurred from:

• damage at a supplier’s premises.
• damage at a customer’s premises or at a contract site.
• damage to the business’ property whilst in transit.
• damage to nearby property which prevents a business from accessing their own premises.
• damage at the premises of a public utility supplier.

What does business interruption insurance cost?

The cost of BI can vary depending on various factors related to your business, theses can include:

• The type of business.
• How the business’ services are provided – from a business’ premises, online services or at events.
• The number of employees.
• The selected indemnity period.
• The expected gross profit for the forthcoming year.

How important is business continuity planning?

Businesses, regardless of size, should regularly review their plans and consider changes to their business as well as other external factors that could influence their operation following a period of interruption.

Continuity planning is important because:

• It enables your business to be prepared for a potential disaster.
• It gives your business flexibility so it can adapt to future changes.
• It mitigates panic in case the business is faced with a threat.
• It can help to minimise losses in the event of a disaster.
• Ultimately, it provides peace of mind.

Contact us on 0333 321 1403 to discuss your business insurance requirements and for a quotation.

Sources:

https://www.caunceohara.co.uk/knowledge-centre/what-is-business-interruption-insurance/

https://www.markeluk.com/articles/what-is-business-interruption-insurance

https://www.darwinclayton.co.uk/news/business-interruption-insurance-a-brief-guide/

https://www.abi.org.uk/products-and-issues/choosing-the-right-insurance/business-insurance/business-interruption-insurance/

https://www.investopedia.com/terms/g/gross-profits-insurance.asp

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