Ultimate Guide to Business Interruption Insurance

Planning for the unexpected is essential for your business's growth and resilience. Risk management is a crucial aspect of your planning, and that's where business interruption insurance comes into play. If you don't have the luxury of employing a risk management expert, business interruption (BI) insurance can seem a little overwhelming at first. With our ultimate guide, you'll learn all about the benefits of this useful business insurance, from what it does and doesn't cover to how to make a claim should the unexpected happen.

What is business interruption insurance?

Business interruption insurance, also known as profit and loss or business disruption insurance, takes care of the financial losses associated with material losses to your business.

For example, if your office suffers a fire, you'll claim for the repair of the building and replacement of lost contents through your commercial property and contents policy. But what if your business can't trade while your office is being repaired? Insurance covers the lost income incurred while you can't operate.

Are there different types of business interruption insurance?

This type of insurance falls under three categories:

• Standard business interruption - which covers interruption to your business caused by material losses
• Contingent business interruption - which deals with losses caused by a disruption relating to one of your suppliers or partners
• Extended business interruption - which offers an extension of cover should your business interruption pass that of your chosen indemnity period

Like all insurance, business interruption insurance can be tailored to cover a wide range of business needs and risks. So how do you know what is right for your company? We outline what is covered under the three most popular loss-of-profit policies: 'All Risks', 'Fire and Special Perils', and 'Engineering'.

All Risks:

This 'all-in' cover will provide a payout for all types of loss, destruction, or damage, unless the cause is specifically excluded from the policy. (Please see below for common exclusions.) It gives you the greatest level of peace of mind but will generally be more expensive than insuring only specified risks.

Fire and Special Perils:

Many businesses looking to strike a balance between costs and benefits opt for Fire and Special Perils cover. This pays out on loss of profit if a fire affects your business. This includes lightning damage and gas explosions relating to boilers or domestic equipment. There are a number of other 'Special' perils that can also be added. These include natural disasters such as earthquakes, storms, and floods, as well as riots, malicious damage, and water escapes.

Bear in mind that you'll need equivalent material damage insurance, or your business interruption costs won't be covered. For example, you'll need to cover your equipment in your premises against material loss in the case of a fire, or your business interruption insurance won't be triggered. This is because it can be assumed that the business will return to trading as normal more quickly if insurance is in place to repair or replace damaged items.

Engineering:

Engineering perils are also commonly insured. This can include being unable to operate your business due to a public utility failure, such as water or electricity.

Which types of businesses could benefit from BI insurance?

Getting back to business as usual as quickly as possible after something goes wrong is essential for the survival of almost every business. That's why BI insurance is a key part of your business risk planning. With it, you'll have the financial protection in place to support recovery.

A business interruption policy can be particularly beneficial for small businesses with physical premises, such as restaurants, stores, salons, or workshops. Being unable to work at your bricks-and-mortar location could result in the complete cessation of trading and the halt of your income. Furthermore, businesses that rely heavily on specialist equipment are also vulnerable to material losses, especially if the equipment is niche and takes time to order and replace.

While there is no legal requirement to hold BI insurance, it offers vital financial protection, so you can keep paying your staff and bills as you rebuild your business. Without this insurance, you would need to personally finance such costs.

What is and isn't covered?

What does business interruption insurance cover? It's the question every business owner wants the answer to - but it's prudent to ask what isn't covered, too.

A business interruption policy can offer cover for business closures relating to:

• Fire or flood damage that affects your premises and/or stock
• Theft or vandalism that affects your premises and/or stock
• Breakdown of key equipment
• Unavoidable supply chain issues
• Access issues that prohibit staff and customers from reaching your premises or location

In such events, business interruption insurance will financially cover:

• Loss of revenue - so you can recoup the income you would have made, were your business able to function normally. This will include any shortfalls in your typical income if you are still able to operate some parts of your business.
• Employee wages - to ensure your staff are paid their usual wages.
• Fixed expenses - such as the rent or mortgage on your business premises, and utility bills.
• Loan repayments - to protect you from falling into arrears.
• Temporary relocation - to cover the costs associated with relocating your business while your old premises or equipment are being repaired or replaced. This could include rent on premises and hire costs for equipment.
• Other increased costs - such as accountant fees.
• Tax coverage - should you be unable to meet your HMRC outlays due to the business interruption.

A business interruption policy won't automatically cover you for everything that can go wrong. Different policies can specify different exclusions, but these commonly include:

• Communicable diseases, such as a pandemic
• Terrorism (unless you specify this and pay extra)
• Riot and civil unrest (as above)
• Nuclear and radioactive explosions
• Pollution or contamination
• War

You should talk to your insurance broker to ensure they fully understand the nature of your business and the risks you face. Your broker will ensure that each aspect is covered appropriately by business interruption insurance.

If you need terrorism cover or another excluded risk, you can usually pay to have it included. Cybercrime is increasingly affecting businesses and can force a virtual shutdown. Speak to your broker if you would like cyber-attacks included in your policy.

How does BI insurance work?

Being faced with material damage to your business and a temporary closure can be stressful and overwhelming. One of the first proactive steps is to alert your insurance company and file your claim.

Read through our step-by-step breakdown of securing business loss-of-income insurance and making a claim to see how the process works.

1. Take out the right level of insurance cover

When you apply for business interruption insurance, in addition to supplying information about the type of business you run, its operations, location, employee numbers, and risk factors, you will also need to provide accurate financials, including past and predicted gross profit and revenue. It is vital that you are as accurate as possible with these figures, or else you could leave yourself underinsured.

It can be easy to underestimate the amount of gross profit that you'll need to cover to protect your business. In addition to your predicted net profit for that period, you need to identify your fixed costs, such as rent or salaries, which will still need to be paid even if you cannot trade.

Avoid using your turnover figure alone, as it includes both fixed costs and variable costs. Variable costs are those that change with turnover, such as materials. The easiest way to make this calculation is to simply deduct the variable costs from your anticipated gross turnover for the coming year.

2. Select your indemnity period

The indemnity period is the maximum time frame during which your policy will cover losses associated with a single event that causes business interruption. Generally, you will be asked to select a 12-, 24-, or 36-month indemnity period. It is always best to overestimate the time it would take to recover your business after an interruption, because building works and equipment repairs can take longer than anticipated. Choose an indemnity period that's too short, and you will be left shouldering the costs beyond that point.

3. Notify your insurer of a claim and gather supporting evidence

Contact your insurer as soon as possible if an event has occurred that will interrupt your business operations. Gather financial evidence for your claim, such as profit and loss reports, sales records, business outgoings, and wages. Ask for quotes if you're relocating your business and need to hire equipment.

Make meticulous records of the event timeline and when business interruption-related losses began to be incurred.

4. Quantify your losses and start the claim

Calculate your profit shortfalls and submit these with supporting documentation. It's an excellent idea to hire an accountant to do all this for you - and don't forget, you can claim for this expense, too.

Top tips for making a claim

When you're going through the difficulties of an unexpected business interruption, the last thing you want is to find that you aren't able to claim back all the money you expected to.

Tip 1: Carefully check the wording of your policy. This will ensure you know exactly what you can claim for and will prevent you from wasting time compiling and submitting information for expenses you can’t claim back.

Tip 2: Gather relevant information from the very start of your business interruption. That way you won’t miss anything out, helping to minimise your out-of-pocket expenses during recovery.

Tip 3: Familiarise yourself with your insurer's claim process, from formatting to timing. This will smooth out the process and lead to prompter payments.

Tip 4: Show caution when you first apply for insurance, and don’t be tempted to choose a shorter indemnity period to save on your premium. This is a common and costly error.

Tip 5: Check your policy exclusions when you’re first applying and add on extra cover if you feel one of the exclusions is a risk for your business. Remember, once the event has happened, you will only be covered for what’s on your policy.

How to source business interruption insurance at the right price

The amount you'll pay for business disruption insurance will vary depending on your business type. For example, a restaurant is likely to pay more for cover than an accounting firm because the nature of the business puts a restaurant at greater risk of fire. Your location can also have a bearing. For example, if you are situated close to a river, your premises may be at greater risk of flooding.

The amounts insured should be sufficient to meet your business needs. If it's not included or not enough, your broker can explain your options: a separate stand-alone policy or combining it with your commercial insurance package.

Use an independent insurance broker with experience dealing with business interruption insurance. Your broker can help you determine the level of cover you need. If you opt for an independent broker, they will not be tied to a single insurance company. Instead, they will use their contacts across the industry to identify and negotiate the best deals available for you. Like ordinary domestic insurance, shopping around in this way really can generate significant cost savings.

Some businesses can save money on your insurance policy by restricting the level of cover they take out. For example:

The increased cost of working cover only. This level of cover may be suitable if your business income is unlikely to be badly affected by physical damage to premises. For example, an office-based business may only need to cover the increased costs of renting a temporary office space. It can continue trading, so no extra cash would be needed to cover lost income during this period.

Conclusion

Business owners can buy substantial security with BI insurance: it helps to safeguard your cash flow and supports continuity. Although it may seem complicated at first, it's worth spending a few minutes to get to grips with it.

Park Insurance is proud to work with the UK’s small business owners, tailoring comprehensive insurance that protects all those years of hard work, whatever happens. We’ll show you how to take out the right level of cover for your business, discuss those useful added extras that ensure you’re never left out of pocket, and deliver competitive prices that offer peace of mind without breaking your insurance budget. Call our experienced team today and see how they can help.