No one ever expects to be the victim of a disaster; however, the last few years have reminded us that events can change in weeks, days, or even hours.
As a business owner, it’s important to protect your business from the problems caused by nature or humans that have a high chance of affecting your ability to trade for a while.
Business Interruption Insurance safeguards your organisation against insolvency resulting from an unexpected event.
In this article, we look at what Business Interruption Insurance covers and whether it could be suitable for your business.
What is covered by Business Interruption Insurance?
It’s crucial to separate between what building and contents insurance products cover and the coverage provided by Business Interruption Insurance.
The former puts the initial damage right but will not pay out for the financial losses you may sustain due to being unable to trade.
For example, if your shop is damaged by fire or a flood, building and contents insurance products will cover the replacement or repair of your business’s premises and stock.
But how do you pay your bills if you cannot trade for months whilst the physical damages sustained are evaluated and repaired?
Business Interruption Insurance covers the losses plus the loss of trading income (commercial profits) you would have received if you were able to operate.
Examples of what may be specifically covered include:
- Loss of profits
- Extra costs of running the business due to the event (for example, consulting fees)
- Fixed operating costs (for example, rent, electricity and water)
- Moving your business to a temporary location
- The loss of revenue incurred if you are forced to close by a local authority
It’s important to emphasise that not all of the above are necessarily covered by Business Interruption Insurance but may be covered in other policies.
For example, if you’re required to relocate to another location, your building insurance may provide cover if your Business Interruption Insurance does not. This is one of the reasons why it’s imperative to read your insurance cover policy carefully.
What events are excluded from Business Interruption Insurance cover?
Most insurers will not provide cover for business interruption stemming from:
- War and terrorism
- Riots or civil disobedience
- Pollution
How do I claim Business Interruption Insurance?
Business Interruption Insurance claims are made through your insurance provider, usually done online or by phoning or emailing the customer service team of your insurance company.
Is Business Interruption Insurance taxable?
Yes, you will be taxed for a Business Interruption Insurance claim, and you will need to pay tax on your Business Interruption Insurance payout if it is or forms part of your taxable income.
How is Business Interruption Insurance regulated?
Like most common insurance and financial products in the UK, Business Interruption Insurance is regulated by the Financial Conduct Authority (FCA).
As well as regulating insurance providers, the FCA also offer guidance and support for the insured to know their rights.
For example, the FCA have a policy checking tool that helps the insured understand what Business Interruption Insurance can be used for and exemptions specific to their policy.
Does Business Interruption Insurance cover wages?
Yes, being able to pay wages is essential to a business’s ability to resume operations quickly and effectively.
Without being able to pay their employees, employers may have to make redundancies and subsequently find it challenging to re-hire talent once the event's consequences have passed.
How much does Business Interruption Insurance cost?
How much you’ll pay for Business Interruption Insurance depends on several factors, including:
- The industry you operate in
- The location of your business
- The number of employees you have
- How much cover do you need
- The number of previous insurance claims you’ve made
To calculate the amount of cover you need, your broker or insurance company will estimate the amount of time it would take for your business to recover from a disaster such as a fire, flood, or explosion and set the length of the indemnity period based on this approximation.
The sales and expenses over the past one to two years will be calculated to calculate the estimated gross profits of your business.
Is Business Interruption Insurance worth it?
Whether or not purchasing Business Interruption Insurance is worth it depends on the type of business you run.
If a fire destroys your premises, could you still operate? If you hold a lot of stock and/or require a large building with specialist equipment, the answer is probably no.
So, it would be a good idea to take care of your risk of falling into insolvency if the event happens by taking out Business Interruption Insurance.
What is the business interruption indemnity period?
Business Interruption Insurance provides coverage for a set period of time known as the indemnity period, in other words, how long the Business Interruption Insurance will last.
This timeframe typically ranges from 12 months to 36 months, starting from the date of the claim incident. This period is specified in the insurance contract so businesses can plan and understand their options when filing a claim with their insurer.
Get legal assistance from LawBite
We understand that navigating legal compliance as a startup or small business can be challenging. Our team offers the experience and knowledge to help ensure your interests are protected. Whether you require assistance with reviewing policies or advice on resolving disputes with insurers, we're here to help.
We believe in supporting startups and small businesses, so we offer guidance that’s tailored to each company's needs. Our experts strive to provide cost-effective and reliable solutions for all your legal compliance requirements. To find out how we can support you concerning business insurance matters, book a free 15 minute consultation or call us on 020 3808 8314.
Additional resources
- What is Before The Event (BTE) insurance?
- Public Liability Insurance - what you need to know
- What is Employers’ Liability Insurance?
- What is Professional Indemnity Insurance (PII)?
- Understanding commercial property insurance
- Understanding the increase in National Insurance contributions
- What is After The Event insurance (ATE)?
