Do you need business interruption insurance?

What is business interruption insurance?

Business interruption insurance is a type of business insurance designed to pay out when your company loses income due to an unexpected situation or event.

It doesn’t cover the cost of repairing the physical damage or replacing your stock or equipment.

If, for example, a flood damages your business premises, your buildings and contents insurance would cover the repairs required, whereas business interruption insurance would cover the related loss of earnings because you could no longer offer your usual services due to the flood and the resulting damage. 

Essentially, business interruption insurance aims to ensure your business survives despite being unable to trade for a certain time.

What does business interruption insurance cover?

What business interruption insurance covers depends on your policy, but most cover you in the event of:

• Damage caused by an accidental fire 

• Flooding and/or storm damage

• Electrical faults

• Equipment theft or vandalism

• Restricted access to your place of work (due to a police cordon, for example)

• Damage at a supplier or customer’s premises that negatively impacts you

• Outbreaks of disease or an infestation of vermin at your business premises

However, terms and conditions do vary, so it’s important to check the small print before choosing a policy. 

What business interruption insurance does not cover

Generally, business interruption insurance does not cover:

• The actual cost of replacing or repairing any damage to your property or equipment - you need business buildings and contents insurance for this

• Injuries to employees or customers at your place of work - you need employers’ liability or public liability insurance for this

• Data breaches and/or cyberattacks - you need professional indemnity or specialist cyber insurance for this

• Damage to stock or equipment once it leaves your business premises - you need goods in transit insurance for this

Again, different insurers cover different eventualities, so it’s sensible to carefully check any policy exclusions and the indemnity period before making your choice.

The indemnity period explained

The indemnity period, or the maximum period during which your insurer will cover your business interruption losses, is a crucial part of your business interruption insurance policy.

It can vary from 12 months to as much as 36 months. This may sound like a lot, but you might need such a lengthy period if your business premises have to be rebuilt after being destroyed in a fire, for example. 

Your insurer may also let you set your own indemnity period, with the cost of the policy increasing in line with the indemnity period you choose.

How much does business interruption insurance cost?

The price of business interruption insurance varies greatly depending on how much cover you need and how you choose to buy your policy. 

Insurers don’t generally offer business interruption insurance as a standalone policy, so most companies get it as an add-on to a standard business insurance policy. 

However, insurers can also add it to business buildings and contents insurance.

How to make a business interruption insurance claim

As with any business insurance claim, the first step is to contact your insurer. 

You’ll need to provide the details of the situation – when it happened and why – as well as evidence of any damage caused.

It’s important to keep receipts for any expenses you incur because of the incident, such as moving to temporary premises. Business interruption insurance typically covers these expenses along with your lost earnings, so you need to keep track of them throughout the process. 

The size of the claim you can make will also depend on:

• How long your business will be unable to trade as a result of the incident

• Your projected income for that period (taking into account seasonal trends, etc.)

• Whether you can continue trading in any capacity (and how much income you can generate this way)

• Your fixed costs, such as employee wages

Is business interruption insurance a legal requirement?

No, there is no legal requirement to have business interruption insurance in the UK. 

This is because the primary purpose of business interruption is to protect your business, not your customers, suppliers, or other individuals or organisations.

However, business interruption insurance could be the difference between your company surviving and going bust should something happen to temporarily stop you from trading.

This is especially true for bricks-and-mortar retailers that would have no income if their premises were to close or for businesses that store large amounts of stock that would cost a lot to replace. 

If you’re unsure whether you need business interruption insurance, it can be helpful to ask yourself the following questions:

• Do you have a business premises?

• Would damage or disruption to that property, including any stock or essential equipment it may contain, cause a material loss of future income?

• How quickly could your business recover from an unexpected event?

• Are your business premises located in an area frequently affected by natural disasters such as storms or floods?