Business Interruption Insurance
Business interruption pays for the trading you lose when an insured event stops you working. The fire is covered by the material damage section, and the six months you spend not earning while the building is rebuilt is covered by this one.
How Business Interruption Works
It is consistently the most underinsured cover in the commercial market, and almost never because somebody declined to buy it. It is underinsured because two numbers on the schedule are wrong: the gross profit figure, which is not the gross profit in your accounts, and the indemnity period, which is not how long the repairs take.
Get those two right and this is the cover that decides whether a business survives a serious loss. Get them wrong and the policy pays a fraction of what was lost, entirely legitimately.
What Business Interruption Insurance Covers
Loss of gross profit
The shortfall in turnover caused by the interruption, less the costs that stop when trading stops. Calculated on the insurance definition of gross profit, which is not the figure in your accounts.
Increased cost of working
What you spend to keep trading: temporary premises, hired equipment, overtime, outsourcing. Usually payable up to the amount it saves the insurer, which is called the economic limit.
Additional increased cost of working
Spending that keeps the business alive beyond what it strictly saves the insurer, such as holding a customer base together. A separate, smaller limit and worth having.
Denial of access
Loss caused by damage at neighbouring property preventing access to yours, typically within a stated radius. Common where a fire next door closes a parade of shops.
Supplier and customer extensions
Interruption caused by insured damage at a named supplier's or customer's premises. Essential where one relationship carries a disproportionate share of the trade.
Loss of attraction
Where damage to a nearby landmark or anchor tenant reduces footfall to you. Relevant to retail and hospitality in a centre or parade.
Where The Cover Stops
Wordings differ between insurers, so treat these as the usual position rather than as universal fact. Where one of them matters to you, it is worth checking on your own schedule before you need to.
No insured damage, no claim
Standard business interruption is triggered by physical damage that the material damage section covers. A downturn, a lost contract or a supplier going bust are not insured events, however damaging.
The indemnity period runs from the damage
It starts at the date of the loss, not at the date you reopen, and once it expires the cover stops even if you are still recovering. A twelve month period on a building that takes fourteen months to rebuild leaves two months uninsured and a business with no customers.
Average on gross profit
Understate the gross profit figure and the insurer reduces the settlement in proportion. Underinsurance here is extremely common because the accounts definition is used by mistake.
Uninsured perils
If the cause of damage is not covered by the property section, the interruption following it is not covered either. Flood and subsidence exclusions are the usual culprits.
Insurance Gross Profit Is Not Accounting Gross Profit
This single distinction is behind most business interruption underinsurance in the UK. Your accountant calculates gross profit by deducting cost of sales, including wages, from turnover. An insurance policy calculates it by deducting only those costs that genuinely stop when trading stops, which are usually purchases and a few variable costs.
Wages are the common error. In the accounts they sit above the line, so they reduce the figure. In the policy they usually need to be insured, because you will keep paying skilled staff through a closure rather than lose them to a competitor, and if they are not inside the sum insured there is nothing to pay them with.
The practical effect is that the insurance figure is usually substantially higher than the accounting figure. Taking the number straight off the accounts, which is the obvious thing to do, is what leaves businesses insured for a fraction of what they need.
Choosing An Indemnity Period That Survives Reality
The indemnity period is the maximum time the insurer will pay for, and twelve months is the default simply because it sounds like the natural unit. It is frequently too short.
Work it through properly. After a total loss you need the site cleared, plans drawn, consent obtained, the building rebuilt, the fit out completed, stock reordered and staff brought back. Then you need the customers to come back, which on a retail or hospitality business takes months after the doors reopen. Twelve months rarely covers the construction, let alone the recovery of trade.
Twenty four months is a more realistic starting point for most businesses with premises, and thirty six is appropriate where the building is unusual, listed, or the trade depends on a location that is hard to replicate. The additional premium is far smaller than people expect, because the risk of needing the back end of a long indemnity period is low.
Declaration Linked Cover
Most insurers offer a declaration linked basis, where you declare an estimated gross profit for the coming year and the insurer applies an uplift, commonly a third, as headroom. At the end of the period the figure is adjusted against what actually happened.
The advantage is that it removes average entirely. Provided the declaration was made in good faith, a business that grows faster than expected is not penalised for it, which is exactly the situation where a fixed sum insured fails.
It suits any business whose turnover is moving, which in practice is most of them. Where cover is written on a fixed sum insured instead, the figure has to be reviewed every year without fail, and reviewed against a forecast rather than against last year's accounts.
What Moves The Price
We do not publish a starting price for this cover, because a figure that is not drawn from a policy we actually placed is worth nothing to you. What we can tell you is what the premium is built from.
- The gross profit sum insured, on the insurance definition
- The length of the indemnity period
- The trade, and how easily it could trade from elsewhere
- How specialised the premises and equipment are
- Dependence on single suppliers, customers or locations
- The perils covered under the property section
We are a broker, so we take it to several insurers rather than quoting one. Call 02382 000820 and you will have a real figure rather than a range.
What We Need To Quote
- Turnover and gross profit, with the wages treatment confirmed
- A realistic estimate of how long a full rebuild and refit would take
- Whether the trade could continue from temporary premises
- Any single supplier or customer worth naming as an extension
- Accounts for the last two years and a forecast
- Details of the property cover the interruption would follow
Cover that often goes with this
The gaps we most often find sitting next to this policy.
- Shop insuranceWhere business interruption normally sits for a retailer, alongside stock and glass.
- Commercial combinedThe package that usually carries the property and interruption sections together.
- Legal expensesA different kind of consequence, and one this policy does not pay for.
- Tradesman insuranceThe trade version of this, with tools and van cover built around it.
- All trades A to ZCover written for your specific trade rather than the general product.
- Talk to a brokerTell us what you do and we will say which of these you actually need.
Common questions
What is the difference between insurance gross profit and the figure in my accounts?+
The accounts deduct all cost of sales including wages. The policy deducts only costs that stop when trading stops, usually purchases and some variable costs, so wages normally need to be inside the sum insured. The insurance figure is therefore usually higher, and using the accounts figure is the most common cause of underinsurance.
How long should my indemnity period be?+
Long enough to rebuild, refit, restock and get the customers back. Twelve months is the common default and is often too short, because it rarely even covers construction. Twenty four months suits most businesses with premises, and longer where the building or location is hard to replace.
Does business interruption cover a downturn in trade?+
No. Standard cover is triggered by physical damage that your property section insures. A recession, a lost contract or a supplier failing commercially are not insured events, however severely they affect the business.
What is declaration linked cover?+
You declare an estimated gross profit and the insurer adds an uplift, commonly a third, as headroom, then adjusts at the end of the period against actual figures. It removes average, which makes it well suited to a business whose turnover is growing.
Does it cover loss of income if I cannot get to my premises?+
Potentially, under a denial of access extension, where the reason is insured damage at nearby property within a stated distance. It is not a general cover for being unable to trade.
Other cover we arrange
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