What is Business Interruption Insurance?

Fires, storms, cyber-attacks – protecting businesses from unexpected events can be challenging. A great preventative measure you can utilise is business interruption insurance (BII).

This type of insurance premium can stand as a crucial factor during such trepid times. Without BII, employers may struggle with the financial losses and irrecoverable damages.

Time is of the essence when it comes to business interruptions. For more information on BII, speak to one of our expert HR advisors today. We’ll help get your business up and running again after facing unplanned incidents.

In this guide, we’ll look at what business interruption insurance is, what it covers, and how to raise a claim after facing unexpected impacts to your business activities.

What is business interruption insurance?

Business interruption insurance (BII) is coverage that protects your business from loss of income after unexpected events.

If your business can’t trade due to a fire, flood, or electrical failure, you could end up losing a lot of money. Not only does it affect profit and income; you could struggle to pay bills and fixed costs. For example, bills, loans, and even staff wages.

Business interruption isn’t a policy that’s sold alone; rather, it’s added on to general insurance premiums. The main aim of BII is to get businesses back to the same trading position they were in before the unforeseen situation happened.

What is covered by business interruption insurance?

Most policies will cover business interruption relating to several issues. Let’s take a look at some examples:

Financial losses:

• Income losses: This is paid back based on the business’s performance from the previous months.
• Fixed costs and extra expenses: These relate to operating costs and other expenses made whilst trying to resume normal trade.
• Employee wages: These cover paying staff wages during the time you’re unable to reopen the business.
• Tax and loan payments: This applies to paying tax and loan contributions, helping to avoid penalties.

Business interruptions

• Training costs: This covers training costs when staff need to learn new working methods or use new equipment.
• Relocations: This relates to the costs of moving to another site in order to trade.
• Fatalities: This applies to any loss relating to the discovery of a death on your premises (i.e., murder or suicide).

External influences:

• Diseases and viruses: This covers losses relating to contagious diseases and viruses found on your premises.
• Public bodies: This relates to the failure of public supplies; like electricity, gas, or communications services.
• Civil authority ingress/ egress: This covers government-mandates that have caused disruption or even closure for your business.

What isn’t covered by business interruption insurance?

Whilst the list above might seem extensive, there are certain factors that aren’t covered by business interruption insurance. For example, BII doesn’t cover interruptions:

• That lasted less than 12 hours.
• Directly caused by suppliers (i.e., from electric or gas companies).
• Caused by strikes or labour/trade disputes.
• Linked to solar flares, weather conditions, or other atmospheric issues. (BII does cover damaged equipment caused by such events).
• Linked to environmental diseases found near your premises.

Are there different types of business interruption insurance?

Yes, there are several types of business interruption insurance available. Choosing which one is subject to the claim at hand. Some of the most common forms of BII include:

Business income coverage: This is used to replace lost income and expenses when a business temporarily closed due to an unexpected event. The coverage compensates for missing profit, payroll, taxes, rent, and other operating costs.

Extra expenses: This is used to cover additional costs that occur when minimising or avoiding shutdown. The coverage may include having to pay staff overtime, rent spaces/equipment, or use temporary transportation.

Contingent business interruption: This is used to manage disruption to suppliers or other partners which your business relies on. For example, if your supplier is unable to deliver goods due a fire, lost income may be compensated.

Civil authority coverages: This is used to protect the business from damages caused by government-mandated closures or other legislative limitations. For example, if your business needs to close due to curfews, you could be financially compensated.

How to raise a claim for business interruption insurance

Unfortunately, employers can’t protect their businesses from unexpected events or natural disasters. You need to concentrate on dealing with the aftermath and prevent recurrence. Let’s take a look at how to raise a claim for business interruption insurance:

Check your insurance policy terms

The first step you need to take is check your insurance policy terms. Business interruptions only cover damage from insured risks. Otherwise, they usually need to be considered as physical damages or losses.

Some policies outline individual risks as part of their insurance terms. Whilst other policies stand as an all-risk policy. It’s important to define your coverage and indemnity period terms within your policy.

Assess your income losses

Next, employers need to assess all losses that have happened since the interruption. This includes financial losses, as well as impacts on your equipment, services, location, and even work practices.

It might be hard to decipher what counts as lost income. Backtrack it from the day of the event and list all negative impacts you’ve faced. For example, disruption to everyday activities, pause in paying wages, or having to replace damaged equipment.

Outline your recovery period

This step involves outlining the time it takes for your premises/equipment to be repaired, replaced, or reinstated. The recovery period acts as a timeframe, documenting when things occurred and how long they’ve lasted.

Business interruption policies usually provide an overarching period for recovery. They’ll usually include benefits to help businesses stay afloat. And tend to end once the business has been restored to their previous position or reasonably close enough.

Calculate lost revenue

At this point, you’ll be able to make calculations on actual business losses. This may include both financial and non-financial losses.

Common examples to consider are loss of earnings, projected sales, lost wages, and a cease in trade with customers/suppliers. The policy should clearly define what is deemed as recoverable – and what isn’t.

Apply deductions

The last part of your claim is to apply deductions through either a money or time period amount. This figure will define an estimated entirety of your business interruption loss.

This declaration should be part of your policy for you to receive insurance payouts. The amount that’s claimable cannot exceed the limit outlined within the policy. This amount is also tax deductible, so make sure these calculations are considered.

What counts as an ‘unexpected event’?

There are numerous incidents that count as an unexpected event. You might have this list outlined within your BII policy. Or you may have an overarching clause that defines general risks.

Common natural disasters reasons can include fires, floods, storms, and other environmental calamities. Third-party impacts may include government-mandates or local authority implements. Some businesses may even face cyber-risks through viruses or hacking.

What is an indemnity period?

An indemnity period is the timeframe where the business was unable to run due to an unexpected event.

The period generally starts from the time of the damage; however, there’s no limit to how long it’ll last. Some policies state insurance payments end once normal business activities have resumed. But it’s hard to define what’s considered as ‘normal’.

How much does business interruption insurance cost?

Business interruption insurance costs vary depending on your insurance package. Payouts are largely based on past financial records and coverage amounts. Other factors can include:

• The type of industry.
• Number of employees.
• Location, revenue, and claims history.
• The terms of the insurance coverage.

Can you claim business interruption insurance for pandemics?

Unfortunately, business interruption insurance policies don’t usually include pandemics, bacterial outbreaks, or viruses. This became especially apparent during the COVID-19 epidemic.

The standard BII policy only applies when a business experiences direct physical loss or damage, like a fire. The argument is that pandemics don’t leave a visible imprint compared to something like storm damages.  

Get expert advice on business interruption insurance with Peninsula

Cyber-attacks, flooding, even road closures – your business may face all kinds of uncontrollable issues that affect everyday trade. Whilst it’s hard to foresee them, employers must prevent and minimise the aftermath of such events.

Peninsula offers expert advice on business interruption insurance. We also offer 24-hour HR advice – helping to support you during unplanned disruption to your everyday business activities.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with an HR consultant today.