Business interruption insurance is designed to help compensate you for financial losses that you may incur if you cannot operate your business for a period of time due to an unforeseen event. The aim is to get your business back to where it was before the incident occurred.
In this blog, we aim to answer all your questions, from why you need business interruption cover to exactly what protection it provides.
Why do you need business interruption insurance?
Business owners often overlook business interruption cover, but if you find yourself unable to trade due to an event, such as a fire or flood, that causes damage to your premises or a breakdown of equipment that is essential to the running of your business, it can be vital for the protection of your livelihood. Business interruption cover is designed to compensate you for any revenue and/or profits that you may lose, and any increased costs of working such as additional staff wages or temporary premises that may be required to keep your business trading. Other cover types, such as buildings or stock and contents cover are important in their own right, but they may not compensate you for the time your business is closed, which could be days, weeks, months or even longer. We have covered businesses for up to three years’ lost trading as a result of an unforeseen incident.
Who needs business interruption insurance?
Business interruption cover is not a legal requirement, it is up to the business owner to assess the factors associated with their business specifically and decide how much protection they need. Ultimately, it comes down to whether substantial damage inflicted on the business’s property or physical assets would affect its ability to trade for any sustained period. If the answer here is ‘yes, it would impact my ability to trade’, business interruption insurance or similar cover should be considered.
What does business interruption insurance cover?
Business interruption cover exists to protect businesses from a property-related incident that affects its ability to trade and cover loss of income if they have to close. The most common claim types are fires and flood, while other claims may include burst pipes, storms, theft and vandalism. The amount paid in a claim is based on how long you are closed for and accounts from previous years. Bear in mind that an incident doesn’t necessarily have to occur on your premises for your business to be affected. We have had Members whose businesses have been forced to close for months due to damage from fires and floods that have occurred in adjacent premises, so things are not always within your control.
To understand business interruption in a bit more detail, here are the key types that you might consider.
1. Loss of gross profit
Loss of gross profit is a common choice of business interruption cover. Essentially it plugs the gap between turnover and profit that is lost as the result of damage sustained to the premises. Because income (turnover) is used to pay many of the costs of running a business, such as staff wages and stock, these costs will not necessarily be incurred if the business is not trading. However, what will be lost is the profit that would have been generated had it been able to trade during the affected period.
2. Loss of gross revenue
Loss of gross revenue covers the loss of your turnover after an incident that affects your business or requires it to temporarily cease trading. This type of cover is suitable for businesses with few or no variable costs associated with turnover, such as solicitors and other professionals who give advice, and whose profit is not reliant on their premises.
3. Increased cost of working (ICOW)
Some businesses would not expect to lose turnover or profit in the event of an incident, such as a home worker, a small office set up or a similar business set up that can easily minimise the risk of impact on their ability to trade. They may, however, find their costs of working increased during the affected period, in which case they may wish to ensure they are covered for ICOW. ICOW is usually subject to a specified economic limit.
4. Additional increased cost of working
Additional increased cost of working cover is usually purchased in addition to ICOW. This type of cover is not subject to a specified economic limit and may not need to stand the economic test that standard ICOW claims are required to. An example would be a restaurant that was forced to close due to an incident, which on reopening has an opportunity to cater for a large event such as a wedding, but for which it would require specialist equipment and delivery. If it can be demonstrated that funding the opportunity would enable the business to get back on its feet more quickly, they may be able to claim under additional increased cost of working cover. This type of cover may be suitable for businesses that are operating in extremely competitive environments, whose customers are very difficult to regain once lost.
5. Advanced profits
Advanced profits cover provides protection for the future earnings of a new business or an extension to an existing business. It is different from standard business interruption cover in that the indemnity period only starts from the date when income would have started to be earned from the new enterprise, rather than from the date of the physical damage.
Note that as a result of the coronavirus pandemic, cover providers may have updated their wordings to provide clarity around infectious diseases such as SARS and COVID-19. You should check your cover documents or ask your cover provider to clarify what is or is not included.
What is an indemnity period?
The indemnity period is the length of time for which benefits are payable under an insurance policy. In the case of business interruption cover, it is the period of time for which indemnity (i.e. compensation) is payable under the terms of the cover. Essentially it covers the period during which the business is affected in one or more of the ways described above, beginning with the date of the loss or damage and ending on or before the maximum indemnity period. The maximum indemnity period is stated within your cover wording and usually varies between 12 and 36 months. At The Retail Mutual we offer an indemnity period of 36 months as standard.
Does business interruption insurance cover employees?
Business interruption insurance will not cover a claim made by an employee, this would be covered by employers’ liability. However, business interruption cover may help to pay employees whilst you are unable to trade.
How much does business interruption insurance cost?
The cost of business interruption cover will be dependent on the specific requirements of your business. Criteria that affect the cost are the size of the business, location, number of employees, extent of the cover and exposure to risks such as flooding.
Would you like a business cover quote?
The Retail Mutual has been supporting independent businesses with an alternative to insurance since 1999, providing cover to over 100 different trade types including retail, hair salons, barbershops and catering businesses. Why not see what we can do for your business by getting a free no-obligation quote from us? Start your quote online today or speak to a member of our service team by calling the number below.