Business interruption insurance explained - Do you need it?

A chef in empty kitchen

The Coronavirus pandemic has been an incredibly difficult time for many individuals, businesses and large corporations. 

If your business has suffered during Covid-19, you may find that your insurance policy may cover you for things like loss of earnings and profit, or if you lose money due to damages, for example.

In our guide to business continuity insurance, we’ll tell you everything you need to know about business interruption cover, what is classed as business interruption and how this type of policy can cover you for Covid-19 claims.

What is business interruption insurance?

In the most simple terms, business interruption insurance, also known as BI, is a specific type of insurance for businesses that is intended to protect you and your business in the event that it is affected by an event or a disaster that renders you unable to operate your business normally.

What is covered by business interruption insurance?

Business interruption insurance also acts as a form of income loss cover as it protects your business’ profits and cash flow in the event that an incident occurs (such as the Covid-19 pandemic) and your business is affected.

It helps to ensure that your business remains roughly in the same financial position as if it wasn’t affected by an incident at all.

Does business interruption insurance cover Covid-19?

Determining whether your business is covered by business interruption insurance caused by issues due to the Coronavirus pandemic depends on the type of cover you have and what exactly your policy covers.

For example, if your business insurance includes a clause for notifiable diseases (without actually listing specific diseases) and a clause that includes government-ordered closure of your business then you might be able to make a claim on your insurance policy.

In the UK, all businesses such as pubs, clubs, many indoor-only restaurants and theatres closed during the lockdowns, which could mean that your business interruption cover would be triggered.

Of course, it’s imperative to check the terms and conditions of your policy as some business interruption policies won’t offer cover for pandemics and may only include damage to property and other incidents. 

Most business interruption policies will cover you and your business in the event that it has to close as a result of damage caused by fire, floods or storm.

Some policies also cover your business in the event that it’s affected by disease, such as the Coronavirus pandemic, but many businesses are worried about whether it’ll actually be covered under their business interruption insurance as there isn’t specific wording in place to cover this kind of pandemic.

As some policies only cover a certain list of diseases, known as notifiable diseases, if your business has to close because of a certain disease (such as the Coronavirus Covid-19 pandemic), you might not be eligible for cover.

Does business interruption insurance cover loss of earnings?

Business interruption insurance covers the loss of earnings if your business has to close and you have a specific policy in place that means you can receive compensation due to closure that’s out of your control.

It depends on the type of cover you have as to what kind of compensation you’ll receive, but most business interruption policies offer cover for loss of earnings and profit.

How do you handle a business interruption claim?

In order to make a claim on your business interruption insurance, you will likely have to collate evidence that shows proof as to why you need to make a claim on your policy.

This may include video and photograph evidence of any damage caused to your property or evidence of your business accounts in order to show proof of loss of income.

How long does business interruption insurance last?

When taking out business interruption insurance, you will need to get it to cover a certain period of time; this is usually the length of time that you expect it to take your business to recover after an incident. Depending on the type of policy you take out, this could be anything between 12 months, up to 24 or 36 months.

How is business interruption calculated?

There are several steps to take in order to calculate your business interruption insurance. While it’s usually much more complex, the following points are the typical steps you should take to calculate business interruption.

Calculate and set the indemnity period (the set cover for a specific amount of time) for your business. In order to do this, you should think about the worst-case situation in which it will take your business to recover.

  • Add an approximate amount of time that you’ll need to retrain staff and obtain new equipment after a long closure of your business.
  • Work out the approximate expected gross revenue of your business during the indemnity period.
  • Work out an approximate expected gross profit during this period.
  • Think about the cost of moving to another premises during the indemnity period in order to keep operating your business.
  • Calculate expected saved expenses during the indemnity period as a result of your business closing temporarily.
  • See if you’d still be eligible to pay the rent on your property during the indemnity period.
  • Work out expected pay for your staff who will not work during the indemnity period and add to the saved expenses.
  • Add expected gross profits, moving costs and potential rental costs and minus expected saved expenses - this is the projected cost of your interruption insurance.

Is business interruption insurance expensive?

The cost of business interruption insurance depends on numerous factors such as the size of the business, the extent of cover you’re wanting to purchase, plus the exposure to risk and the amount of deductibles.

Therefore, some businesses may find that their interruption insurance is incredibly expensive, but it all just depends on the above factors.

Is business interruption insurance worth it?

Business interruption insurance is worth it if you want to protect your business against incidents and events that are beyond your control.

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