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Table of Contents
- Do I need business interruption insurance?
- What is covered by business interruption insurance?
- What is contingent business interruption insurance?
- Business interruption insurance exclusions
- Do I need business interruption insurance?
- Business interruption insurance and Covid-19
- How much does business interruption insurance cost?
- Which other types of business insurance do I need?
- Business interruption insurance – FAQs
Business interruption insurance can protect you against floods, fires and many other unexpected disasters.
It’s there to cushion the blow of such events. It might even help prevent your business from going under.
In basic terms, business interruption insurance is defined as a policy that covers loss of income or additional costs of doing business when your business’s normal activities are disrupted.
Instead of covering compensation for property damage, it deals with the medium- to long-term loss of income that arises from the property damage or disruption itself.
For example, if trading is halted by a flood at your shop, a business interruption policy can act as a bridge to help your business back on track.
Read on to find out whether you need business interruption insurance, what it covers, and how it applies to Covid-19.
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Do I need business interruption insurance?
While there is no legal requirement to take out a business interruption policy, it is a form of insurance that should not be overlooked.
The main factors to be aware of when considering business interruption insurance are:
- whether you have a business premises
- whether any damage or disruption to that property, including any essential equipment within, would cause a material loss of future income
- how quickly your business could recover from an unexpected event causing disruption
- whether your business premises are located in an area frequently affected by natural disasters, such as flooding or wildfires
For example, if a fire or flood at your business premises would stop you from trading for a significant period, you may want to take out business interruption insurance.
This is especially true for brick-and-mortar retailers, which might lose all income if their premises closed, or store large amounts of stock that would have a serious financial impact if stolen or damaged.
On the other hand, businesses that rely on an internet connection and little else – say a freelance writer working on a laptop, or a small business with employees who could work from home – may not necessarily require business interruption insurance.
What is covered by business interruption insurance?
Typically, a business interruption insurance policy is designed to cover lost income and other expenses if your business premises, including essential equipment, are damaged or disrupted by fire, flood, wind, lightning, theft or falling objects.
Some policies will also include clauses to cover infectious diseases, such as coronavirus, as well as cover for people not being able to enter your business premises.
What is the indemnity period?
Arguably the most important part of your business interruption policy is its indemnity period. This is the maximum length of time your business interruption losses will be covered by the insurer.
It is vital to realistically assess how long it would take your business to trade again after a disaster or disruption, to ensure your business interruption policy covers you for the appropriate time. This includes any rebuilding or restoration that might be required, and replacing lost or damaged stock.
The standard time frame for the indemnity period is between 12 and 36 months.
Which costs are covered by business interruption insurance?
The costs that business interruption insurance will compensate you for will depend on your policy’s details. It can include:
- Loss of gross profit and gross revenue the business would earn if there were no disruption.
- Increased cost of working, such as renting a new, interim space or equipment.
- Ongoing operating costs, such as wages, rent or mortgage, taxes and utilities.
- Loan payments for loans taken out before the period of inactivity.
These costs will be covered for the length of the stated indemnity period.
What is not covered by business interruption insurance?
What business interruption insurance doesn’t cover, however, is the cost of damage to the property or equipment itself. For this, you would instead need building and contents insurance, equipment insurance, or commercial property insurance.
If employees or customers are injured at your place of work, those claims would be covered by employers’ liability or public liability insurance.
» MORE: What is business liability insurance?
What is contingent business interruption insurance?
There is another type of interruption insurance that applies if a prominent third party business you deal with, such as a major supplier or buyer, suffers a disruption that impacts your business’s income. This is called contingent business interruption insurance.
It would cover the same kinds of costs and losses as standard business interruption insurance. However, you need to list these business partners as dependent properties on your policy.
This could be your restaurant’s sole produce supplier (i.e. a contributing location), a client that makes up the majority of your income (i.e. a recipient location) or the factory that manufactures your products (i.e. a manufacturing location).
It could even be a third-party business that draws customers to your business’s area, such as a shopping centre, football stadium or music venue. These are called leader locations.
Business interruption insurance exclusions
Some incidents that can disrupt your business may be excluded by some providers. Among the most common to watch out for are:
- war or terrorism
- some types of property damage
- communicable diseases
- cyber attacks
- fraud or dishonesty committed by the business owner
Make sure to carefully read the wording of any policy you consider, making sure that the right risks are covered.
Do I need business interruption insurance?
While there is no legal requirement to take out a business interruption policy, it is a form of insurance that should not be overlooked.
Without business interruption insurance, your business would have to pay any fixed costs, such as wages and bills, and cover any loss of income itself if something happened that forced it to stop trading.
While the cost of repairing or replacing any property that may be damaged should be covered by buildings and contents insurance, only business interruption would cover the cost of lost revenue and any extra expenses you had to pay during that period.
The main factors to think about when considering business interruption insurance are:
- whether or not you have a business premises
- whether any damage or disruption to that property, including any stock or essential equipment it may contain, would cause a material loss of future income
- how quickly your business could recover from an unexpected event causing disruption
- whether your business premises are located in an area frequently affected by natural disasters, such as flooding or wildfires
It’s up to you to think about the effect any unexpected incident would have on your business and your ability to work as normal. If it’s likely to have a significant financial impact that could make it difficult for your business to survive, then taking out insurance to cover this might be worthwhile.
So, for instance, if a fire or flood at your business premises would mean you could not trade for a significant period of time and you’d struggle financially to get by, you may want to take out business interruption insurance.
This is especially true for bricks and mortar retailers, which might have zero income if their premises were to close, or store large amounts of stock that would have a serious financial impact if stolen or damaged.
On the other hand, businesses that rely on an internet connection and little else – say a freelance writer working on a laptop, or a small business with employees who could work from anywhere – may not necessarily require business interruption insurance.
» MORE: Should I get business insurance?
Business interruption insurance and Covid-19
During the Covid-19 pandemic, there was much discussion about how business interruption insurance applied as national or local lockdowns forced businesses to shut or outbreaks meant owners and customers needed to isolate.
The number of rejected business interruption insurance claims led to an investigation by the Financial Conduct Authority (FCA) into the application of ‘non-damage’ business interruption clauses to Covid-19-related closures. The High Court then ruled broadly in favour of policyholders and in September 2024, the Court of Appeals also sided with policyholders.
The FCA’s policy checker can help you find out if your business interruption insurance will cover financial losses caused by Covid-19, by comparing it to the representative sample of test cases considered by the High Court.
If your policy contains an infectious disease clause, you need to prove that Covid-19 is present within a certain radius of your business, or at your premises. This is called the Relevant Policy Area (RPA).
The FCA has a calculator to help you find proof, but only if your policy covers Covid-19 within a certain distance from your business.
Other recommended forms of evidence include:
- Personal knowledge of Covid cases within your RPA (e.g. yourself, a member of staff or a customer).
- Media reports from reputable sources.
- NHS or Office for National Statistics (ONS) data on deaths due to Covid-19.
- Reported cases of Covid by local authorities.
It is important to note that, even years later, businesses might still be able to raise a claim for business interruption losses due to the COVID-19 pandemic. However, this should be pursued as soon as possible, as businesses are unlikely to be able to claim beyond 2026.
How much does business interruption insurance cost?
Most of the time, business interruption insurance will be bundled together with other business insurance packages as an optional extra. It is often added to policies dealing with business properties, such as building and contents insurance.
Before deciding on the scale of your business interruption policy, carefully assess the potential loss of income your business would suffer in the event of damage or disruption to its premises, a realistic recovery time, and the costs you are liable for during the inactive period, such as mortgages, rents, wages, utilities, loans and taxes.
The insurer will then also consider the risks associated with your industry, the location of your business premises, and any previous claims made.
This will help inform the level of coverage you need and the cost of your overall premium.
Given the complexity of business interruption insurance policies, consider using an insurance broker to get the right level of coverage.
» MORE: Do I need business insurance?
Which other types of business insurance do I need?
- Public liability insurance
- Product liability insurance
- Professional indemnity insurance
- Employers’ liability insurance
- Cyber insurance
Business interruption insurance – FAQs
Business interruption insurance – FAQs
Fires and flooding are often cited as the most common causes of business interruption, but that might be changing.
That’s because recent years have seen cyber issues rise to become the most feared cause of business interruption. With the shift to flexible and home working, along with the digitisation of processes, perhaps this is not surprising.
Under some circumstances, business interruption insurance can cover the loss of rent for landlords. Usually, business interruption insurance protects against damage to a property causing losses, but it may also extend to non-damage-related situations as well.
Your best option for coverage as a landlord will likely be some form of landlord insurance, which can include business interruption insurance.
Image source: Getty Images
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