Guide to Business Interruption Insurance

Business Interruption Insurance (BI) is an essential coverage for businesses to protect themselves against the financial losses that can occur when operations are disrupted due to unforeseen events, such as natural disasters, fires, or other emergencies. This guide will explain what Business Interruption Insurance is, why it's important, and how it works.

Without the correct insurance in place an event that starts with business interruption will often lead to business termination so even when you have business interruption insurance in place, it’s important to calculate it correctly. In fact 40% of declarations are deemed too low, by as much as 45%!

What is Business Interruption Insurance?

Business Interruption Insurance is designed to help businesses recover from a temporary closure or reduction in operations caused by a covered event. It provides compensation for lost income, fixed expenses, and other related expenses during the period of interruption, allowing the business to get back on its feet.

This type of insurance typically covers:

• Lost revenue: Compensation for income the business would have generated if operations had continued without interruption.
• Fixed operating expenses: Ongoing expenses such as rent, utilities, salaries, and other regular costs that continue even when the business is not operating.
• Extra expenses: Additional costs incurred to temporarily relocate or continue operations while repairs or restoration take place.

What Does Business Interruption Insurance Cover?

Business Interruption Insurance generally covers losses caused by various events, including:

• Fire or Flood: Physical damage to the business premises due to fire, water damage, or other natural disasters.
• Vandalism or Theft: Damage to the premises or theft of inventory or equipment that halts normal operations.
• Equipment Failure: A breakdown of essential machinery or equipment that prevents the business from operating.
• Supply Chain Disruptions: A disruption in the supply of goods or services essential to the business.
• Pandemics or Health Crises: In some cases, coverage can apply when business operations are interrupted due to a health crisis, such as a pandemic.

What Business Interruption Insurance Does NOT Cover

While Business Interruption Insurance is comprehensive, there are exclusions to be aware of, such as:

• Losses from non-physical events: If the interruption is caused by a non-physical event (e.g., a data breach or failure of the internet), coverage may not apply unless specified in the policy.
• Poor management decisions: Business interruptions due to managerial or operational mistakes (e.g., poor forecasting or mismanagement) are typically not covered.
• Civil unrest: Some policies may exclude disruptions caused by civil disturbances, including riots or strikes, unless specifically included.
• Uninsured perils: Any event that is not specifically covered by the insurance, such as certain types of flooding or earthquakes, may be excluded unless additional coverage is purchased.

How Does Business Interruption Insurance Work?

In the event of a covered interruption, your business must file a claim for compensation. The process generally works as follows:

• Notification: Contact your insurer immediately to report the interruption.
• Documentation: Provide necessary documentation, such as financial records, proof of loss, and estimates of repairs or restorations.
• Loss Evaluation: The insurer will assess the damages, determine the validity of the claim, and calculate the amount of compensation owed.
• Compensation: Once the claim is approved, the insurer will provide compensation for lost income and ongoing expenses based on the policy’s terms.

How to Calculate the Coverage Limit

When calculating your business interruption insurance it is important to get your gross profit calculation correct as well as the period of indemnity. Whilst doing this you should consider any anticipated growth or costs that may vary as well as time constraints such as demolition and site clearance of buildings, re-design, planning permission, reconstruction, equipment or machinery replacement, stock replacement and the restoration of your supplier and customer base.

Key factors in determining the appropriate coverage limit include:

• Revenue History: Insurers often use past financial records to determine your average monthly revenue.
• Fixed Costs: The ongoing expenses that continue even if the business isn’t operational.
• Recovery Period: The expected time it will take to get your business back to normal operations after an event.

It’s important to work with your insurer to ensure that your policy limits are sufficient to cover your business's needs in the event of a serious interruption.

How to Choose the Right Business Interruption Insurance

Selecting the right Business Interruption Insurance depends on the size, industry, and specific risks your business faces. Consider the following when choosing a policy:

• Assess your risks: Evaluate what types of disruptions your business is most likely to experience (e.g., fire, supply chain issues, etc.).
• Coverage needs: Determine how much coverage you need based on your business’s income, expenses, and time required for recovery.
• Policy details: Read the fine print of the policy to ensure it covers the events you are concerned about and understand any exclusions or limitations.
• Consult with a broker: If you’re unsure, work with an insurance broker who can tailor the right coverage for your business.

Important Terms to Know

• Indemnity Period: The period during which you are covered for lost income. It begins from the time the business is interrupted and continues until the business is restored to normal operations, or for a set period outlined in the policy.
• Gross Profit: A common basis for calculating loss of income. This includes sales revenue minus the cost of goods sold, but not operating expenses like rent or salaries.
• Contingent Business Interruption: This type of insurance covers losses due to disruptions in your suppliers’ or customers’ businesses (e.g., if your key supplier faces a disruption and you can't access inventory).

Benefits of Business Interruption Insurance

• Financial Security: Provides a safety net, ensuring that you can cover expenses and continue paying employees even when business is not operational.
• Peace of Mind: Helps you focus on recovering from the event instead of worrying about how to stay afloat financially.
• Reputation Protection: With a business interruption policy in place, your business can recover faster, helping maintain customer trust and reputation.

Is Business Interruption Insurance Mandatory?

Business Interruption Insurance is typically not legally required, but it is highly recommended for most businesses. In some cases, such as with landlords or lenders, it may be a condition of your lease or financing agreement.

Tips for Business Owners

• Review your policy regularly: As your business grows or changes, ensure your coverage limits are still adequate.
• Consider Business Continuity Planning: A solid continuity plan can complement your insurance and help you recover faster.
• Understand your deductible: Be clear about how much of the loss you must cover before the insurance kicks in.

Making a business interruption claim

Many insurers may exclude the first few days following a disaster from calculations, so you need to bare this in mind. It is important to consider keeping electronic copies of documents off-site to help with your business interruption claim. Proving your losses will be more difficult without these.

Business interruption claims often involve many different parties including loss adjusters, accountants and lawyers, so it is important to have everything expertly project managed. Working with an experienced broker to make sure policy wording, extensions and limits are correct is key. Here at Bluedrop our experienced advisors can help by working with you to help get your business up and running as quickly as possible.