What is Business Interruption Insurance?
Business interruption (BI) insurance protects your income when your business can't operate due to an insured event. While property insurance covers the cost of repairing physical damage, business interruption covers the financial losses you suffer while repairs are carried out.
Consider this scenario: A fire damages your shop. Your property insurance pays to repair the building and replace your stock. But what about the three months you can't trade while repairs happen? Your rent still needs paying. Your staff still need wages. Your regular customers may go elsewhere. Business interruption insurance addresses these losses.
How Business Interruption Works
When you make a business interruption claim, the insurer calculates your loss based on:
- Reduction in turnover: How much less you're earning compared to normal
- Increased costs of working: Extra expenses to minimise the interruption
- Standing charges: Fixed costs that continue even when you can't trade
The claim continues until either your business returns to normal trading levels or the indemnity period expires—whichever comes first.
What's Covered?
Business interruption typically covers:
- Lost gross profit during the interruption
- Ongoing fixed costs (rent, rates, loan repayments)
- Staff wages (to retain key employees)
- Increased costs to minimise the interruption
- Additional expenses to continue trading elsewhere
Calculating Your Cover
The sum insured for business interruption is based on your gross profit, not your turnover. Gross profit is your turnover minus variable costs (costs that stop when you stop trading, like stock purchases).
The formula is:
Gross Profit = Turnover - Variable Costs
You then multiply this by the indemnity period you choose. For example, if your annual gross profit is £100,000 and you want 12 months' cover, your sum insured would be £100,000. For 24 months, it would be £200,000.
The Indemnity Period
The indemnity period is the maximum time the policy will pay out. Common options are:
- 12 months: Suitable for businesses that could recover quickly
- 18 months: A middle-ground option
- 24 months: Recommended for most businesses
- 36 months: For businesses with long recovery times
Choosing the right indemnity period is crucial. Consider how long it would take to:
- Repair or rebuild your premises
- Replace specialist equipment
- Restock your inventory
- Rebuild your customer base
- Return to normal trading levels
Many businesses underestimate recovery time. A major fire could take 18 months to repair, and it may take another 6 months to rebuild your customer base. A 12-month indemnity period would leave you exposed.
Useful Extensions
Standard business interruption cover can be extended to include additional scenarios:
Suppliers Extension
Covers losses if your key supplier suffers an insured event that affects their ability to supply you. Essential if you rely on specific suppliers.
Customers Extension
Covers losses if a key customer suffers an insured event that affects their ability to buy from you. Important for B2B businesses with concentrated customer bases.
Denial of Access
Covers losses if you can't access your premises due to damage to neighbouring properties or emergency services cordoning off the area.
Public Utilities
Covers losses caused by failure of public utilities (electricity, gas, water) at the supply point, not just at your premises.
Prevention of Access
Covers losses if access to your premises is prevented by a public authority, such as police closing a road after an incident.
Is Business Interruption Worth It?
The short answer: almost always yes.
Consider the alternative. Without business interruption cover, a major incident could mean:
- No income for months while repairs happen
- Ongoing costs eating into your savings or reserves
- Having to let staff go (and struggling to rehire)
- Customers finding alternative suppliers
- Potentially having to close the business permanently
Statistics show that a significant percentage of businesses that suffer major incidents without adequate insurance never reopen. Business interruption cover could be the difference between recovery and closure.
The key is getting the cover right—adequate sum insured, appropriate indemnity period, and relevant extensions for your business. A specialist broker can help you assess your needs and find the right policy. If you need to make a claim, our step-by-step claims guide walks you through the process.
Important Disclaimer
This article is for general information only and does not constitute insurance advice. The specific terms, conditions, and exclusions of any policy will vary. Always read your policy documentation carefully and speak to a qualified broker for advice tailored to your circumstances.
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