How does business interruption insurance work?

19 February 2019

You’ll find business interruption insurance under many different names. Business income and extra expense insurance, to cite two examples, or perhaps time loss, consequential loss, and loss of profits insurance. We think "business interruption insurance" is simpler and works better as an overarching title – so here’s a little on how it works as a policy, and for whom.

The go-to example of when a business interruption insurance policy kicks in is when a property is damaged by fire. Given the circumstances of the accident in question, it would be standard property insurance that covers structural damage and any contents covered by the policy. However, what about the rest of the costs involved in running your business?

Office building at sunset

What is covered

Using the example above, once the fire has settled and your property insurance policy is doing its job, you might be in a spot of bother with your business. Are you paying for a new, temporary or permanent business location? Is your business still costing you money to run? Furthermore, what about the profits in which you’re already missing out while you sort all of this out?

This is where your business interruption insurance comes in. Usually based on the past financial records of your business, the policy kicks in from the moment you incur these extra costs (or begin to lose out on money you would normally be making). Crucially, it can also help you to pay your taxes and continue making your loan payments, and cover you for other regular, fixed costs.

A comprehensive policy will even cover you for any retraining required – for instance, if a particular piece of equipment is destroyed and replaced by another that your staff have never used. This is where the policy will really help you – with business interruption insurance, the cover can help you to continue paying your staff even while your business is in a state of shutdown.

And what isn’t

As you can imagine, the potential cost to business in the above example could be huge. Subsequently, business interruption insurance, like most types of insurance policy, does come with several exemptions. For instance, in the event that you have to move properties, even in a temporary capacity, your utility bills will not be covered.

This is simply because, if the building isn’t suitable for work, then the utilities aren’t being used. If you ever find yourself in this situation, do remember to sort out your utility bills with your providers. Also, if your building is only closed for a short time, partial shutdowns are not covered. A business is usually required to be shut for at least 72 hours before a policy will come into play.

However, most pertinently, and this is something that you must remember when you take out a policy, you will not be reimbursed for any income that isn't documented. Yet another reason to keep your accounting procedures up to scratch, a sudden upsurge in income won’t be covered as ‘profits lost’ unless you’ve carefully tracked the cost involved.

Who is it for?

Losing a workspace to fire, and having to retrain staff to use new equipment, does suggest that this type of insurance is more suited for industrial business owners. However, it’s a far more practical, flexible solution than that, and is actually well-suited to small business owners and people who work from home, too. With an estimated 15% of the entire workforce now self-employed, this means that a large, growing number of people with an entrepreneurial mindset could benefit from this type of policy.

Business interruption insurance is actually one of several policies recommended by smallbusiness.co.uk for people about to move into freelancing and self-employed work. Given the increased likelihood that working from home is an option, losing one’s place of business to fire, again, becomes a possibility.

The various costs of such an incident would be covered by different insurance policies, including home insurance and contents insurance, if applicable. However, in such an instance, it would only be business interruption insurance that allows you and any staff to work, without losing money, while your home office or business premises are repaired.

What other events are covered?

In most circumstances, businesses are also covered for closures related to flooding. If there is a breakdown of equipment that is crucial to your operations and not covered by another relevant policy, then this, too, can be covered.

Similarly, if a key supplier is unable to reach you, and your ability to sell stock is reduced, you will find that business interruption insurance can help you out. The policy will depend on a number of factors, including business size, location and other key variables which you can discuss with us by calling Be Wiser on 0333 999 0802 today.