Protecting Your Business: Understanding Business Interruption Insurance

Unexpected events can happen at any time, and when they do, they can disrupt business operations and result in significant financial losses. Where property insurance replaces your buildings, stock and contents after a loss it is a business interruption insurance policy that covers the financial losses incurred while you are unable to trade. It is often these expenses, and the time it takes to recover from a loss, that are overlooked and can prohibit your ability to recover after a loss. 

In this blog, we’ll explain in detail what business interruption insurance is and give you all the information you need to choose the cover you need to protect your business. Whether you’re a small business owner or a large corporation, understanding how business interruption insurance works can be crucial in protecting your business and ensuring its continued success. 

What is business interruption insurance, and how does it work? 

Business interruption insurance is a type of insurance that helps businesses recover financially when they experience a disruption to their normal operations. It provides cover for lost income, as well as additional expenses that may be incurred because of the disruption. 

Typically, business interruption insurance is triggered when a business experiences an insured event, such as a fire, flood, or storm, that causes damage to the property or equipment necessary for the business to operate.  

Your property insurance will put right damage to the buildings but there are financial losses such as finding alternative premises to rent, ordering new machinery, the lost revenue while you’re unable to fulfil customer orders and ongoing business costs that don’t stop because you can’t trade.  

Business Interruption achieves this by continuing to pay the ongoing fixed costs and expenses that cannot be paid out of the reduced income, paying for the additional costs incurred to prevent or reduce the lost in income such as the cost of repairs, installation of temporary repairs, the installation of temporary machinery, and the cost of alternative premises.  

It’s important to note that business interruption insurance is typically offered as an add-on to a business’s property insurance policy, rather than as a standalone policy. This means that businesses need to have property insurance in place to be eligible for business interruption insurance. 

How do I know if I need business interruption insurance, and what factors can affect my cover? 

Deciding whether to get business interruption insurance will depend on how long you can afford to be out of operation if a disaster were to occur. 

Generally, if your business relies on a physical location, equipment, or stock to generate income, then business interruption insurance can be a valuable investment. This includes businesses in industries such as manufacturing, retail, and hospitality, as well as service-based businesses such as law firms and accounting practices. 

Factors that can affect your business interruption insurance coverage include the type of cover you choose, the limits of your policy, the deductible you select and the length of time you need the cover for.  

Business interruption insurance: Doesn’t Buildings & Contents Insurance cover this?  

Buildings & Contents Insurance can provide coverage for physical damage to your business property, such as your building, equipment, and inventory. However, it typically does not cover lost income or extra expenses that result from an unexpected disruption to your business operations. This is where business interruption insurance comes in. 

Business interruption insurance is designed to cover the financial losses that can result from an unexpected event, such as a fire, flood, or natural disaster, that disrupts your business operations. It can provide coverage for lost income, payroll expenses, and other costs associated with getting your business back up and running after an insured event. 

While Buildings & Contents Insurance is an important component of protecting your business property, it may not be enough to fully protect your business from the financial impact of a disaster. By adding business interruption insurance to your insurance program, you can help ensure that your business can continue to operate and generate income, even in the face of unexpected disruptions. 

Are there different types of business interruption insurance policies available?

There are several different types of business interruption insurance, and the method of cover is usually governed by the nature of the business and the way in which the income is earned is described in the accounts. Here we summarise the main types of business interruption cover:  

Gross Profit 

The most common form of cover is gross profit. It is a suitable form of cover for a business producing, wholesaling or retailing goods and involving sales, purchases, opening and closing stock. it is important to note here that insurance gorss profit and accountants gross profit are calculated differently.

Gross Rental 

This cover is suitable for those businesses which receive rental income from properties that they own. 

Gross Revenue 

This cover is suitable where the business provides a service but may have inter-linked business activities which could involve stock and the sale of goods. 

Gross Fees 

This cover is suitable where the business provides a service rather than a product and charges a fee for that service. The business will have little or nothing in the way of any stock in the form or raw materials or finished goods. 

Increased Cost of Working (ICOW) 

Occasionally, a business may decide that, due to the nature of the business, the income from the business will not be reduced regardless of the size of any physical loss or damage to the business. 

This could be the case if the business only needs to insure the costs involved in hiring and furnishing a temporary office, so they do not need to insure all the income. Typical for businesses who is A contractor, who earns their income from a third-party locations but need a support office to manage work and generate invoices.  

Additional Increased Cost of Working (AICOW) 

This is usually an optional cover under a business interruption policy but can be a vital one, as this cover allows for additional expenditure during the interruption which helps to get you back up and running more quickly.  

How long will it take to recover after a loss?  

The business interruption insurance covers trading and financial losses that are a direct consequence of a business disruption. If you underestimate the amount of time it will take to resume normal trading after disaster strikes, you could see yourself out of business. It’s important to take time to consider the following things: 

• Building repairs including planning permission even if you are not responsible for these 
• Machinery and plant replacement 
• Stock replacement and supply chain issues 
• Rebuilding customer relationships if customers have taken their business elsewhere 
• Potential loss of customers 

An insurance policy usually runs for 12 months. Under a business interruption insurance policy, you can select the indemnity period, how long the business interruption will take to recover from, this usually starts at 12 months and increases in 12-month increments. It is important to remember that if your business interruption cover is £100,000 but it will take you up to 2 years to recover then you will need £200,000 of cover. It is worth noting that these examples are just used to highlight how the cover operated and as your insurance broker we will help you calculate the amount of cover you need based on your specific circumstances. 

If you are insured for an interruption period of 24 months and you have a loss on the last day of the 12-month policy period then the policy will cover trading losses for the next 24 months, i.e., 36 months after the policy starts. Therefore, you will need to ensure that the business interruption sum insured is not just correct when you take out the policy but will be correct 36 months later and will take into account both inflation and business growth. 

What events or types of losses are covered under a typical business interruption insurance policy?  

A typical business interruption insurance policy covers losses caused by unexpected events that disrupt normal business operations and runs alongside the perils covered in your material damage insurance, such as: 

• Natural disasters, such as floods, hurricanes, earthquakes, and wildfires. 
• Accidental damage to the property, such as fire or water damage. 
• Power outages or other utility failures. 
• Denial of access to your premises. 
• Civil unrest, such as riots and strikes. 
• Acts of terrorism. 

These events can result in a variety of losses, including lost revenue, increased expenses, and additional costs to mitigate the effects of the disruption. Business interruption insurance can provide coverage for these losses, helping businesses to recover and resume normal operations as quickly as possible.  

Are there any exclusions or limitations to business interruption insurance cover?  

All insurance policies contain exclusions and are typically subject to certain limits based on the level of activity within a specific timeframe.  

The specific cover and exclusions of a policy can vary depending on the insurer and the terms of the policy, which is why using an independent insurance broker to help you understand the risks you face and using your unique risk profile and our expertise broking we can match you with the cover you need and explain to you clearly what is and isn’t covered.  

Can I add additional coverage to my business interruption insurance policy, such as coverage for cyber-attacks or supply chain disruptions? 

You may be able to add additional cover to your business interruption insurance policy, depending on your insurer and the specific terms of your policy. Cyber-attacks and supply chain disruptions are two types of events that can cause significant business interruption, and there are insurance options available to protect against these risks. 

For example, you may be able to purchase cyber insurance to cover losses from data breaches or other cyber-attacks that disrupt your business operations. This type of coverage can help you recover lost income and pay for expenses related to repairing your systems and restoring your business. 

Similarly, you may be able to add cover for supply chain disruptions, which can occur when a supplier experiences a problem that affects your ability to obtain the materials or goods you need to operate your business. This type of coverage can provide financial protection if you experience a loss of income or additional expenses because of supply chain disruptions. 

How much does business interruption insurance typically cost? 

The rather unsatisfactory answer is it depends, and not only that, but it also depends on several factors including; 

• Your attitude to risk 
• Your business activities 
• Your processes 
• Where you are based 
• How much cover you need
• How long it will take you to get back up and running
• If you have had any previous claims

Which is why we use our experience of the insurance market and the details of your business to get the right cover for your business and budget. Our advice would be that if you are in the least bit concerned that you don’t have the right business interruption insurance then give us a call to discuss it. We would love to be able to help you.  

How do I get a quote for business interruption insurance?  

Our first suggestion would always be to get in touch with us and we’ll walk you through the process, but it would be useful, but not essential, if you had the following information available: 

• Business information: This includes company name, location, size, and industry. 
• Financial information: You will likely need to provide financial accounts, such as profit and loss statements, balance sheets, and cash flow statements. 
• Claims history: Insurers will want to know about your business’s past claims history, including any business interruption claims you have filed in the past. 

Calculating the gross profit can sometimes cause confusion as insurers and accountants calculate the amount differently, but we have a helpful calculator which uses seven pieces of information to calculate the gross profit for insurance purposes. 

What steps can I take as a business owner to reduce the risk of a business interruption insurance claim? 

As a business owner, there are several steps you can take to reduce the risk of a business interruption insurance claim: 

• Complete regular risk assessments of your business. 
• Ensure you have a business continuity plan (BCP) and disaster recovery plan in place (DRP). 
• Make sure your technology is up to date and systems are protected from cyber-attack. 
• Installing and maintaining sprinkler systems to minimise fire damage. 
• Maintaining machinery to prevent unexpected downtime. 
• Spread your supplier base so the business isn’t dependent on any single supplier. 
• Installing security cameras and alarms to deter burglars and vandals. 
• Ensure your employees are trained in the procedures outlined in your business continuity plan.  

What Next?  
Unexpected events can occur at any time and result in significant financial losses, which can disrupt business operations. Property insurance only replaces buildings, stock, and contents after a loss. Business interruption insurance, on the other hand, covers financial losses incurred while a business is unable to trade.  

If your business relies on a physical location, equipment, or stock to generate income, then business interruption insurance can be a valuable investment. With the current economic climate seeing high inflation, soaring energy costs and no immediate signs that pressures on cashflow are receding it can feel uncomfortable committing more budget to management and mitigation of risks, but if you suffer a large loss that halts business trading as usual, business interruption insurance could be the difference between success and failure.  

While this article gives a good overview of questions, we often get asked about business interruption insurance, it is a broad and technical field of insurance and not one we would advise you try and buy without the advice of an insurance broker, like Atom Insurance Brokers. We use our knowledge and experience to guide you through risk profiling, your risk management options, the buying process, what’s covered and what isn’t as well as what happens if you need to make a claim – you will have our expert in-house claims team on hand to support you every step of the way.  

We hope that this article has been informative and has given you some practical steps to improving and increasing awareness of the risks of lithium-ion batteries together with information on how to use them safely. Please share this with anyone you think will find it useful and if there are any questions about this issue, please do not hesitate to contact one of the team on 01823 442214 or email us at insurance@atominsurance.co.uk