Do I need business interruption insurance?

The destruction of, or damage to, property after a major incident (such as flooding) can have serious results for any business. The damage to the property is one thing but often this is nothing when compared to the loss of income that can follow when your business is unable to continue trading as a result of the damage. It’s in this area that business interruption insurance, which we consider here as part of our series on the types of insurance that your business should consider taking out, can help.

What is business interruption insurance?

Business interruption insurance is designed to cover you for your loss of income when you are unable to carry out your business as usual as a result of an unexpected event.  The aim of business interruption insurance is to put your business back in the same trading position it was in before the event occurred.  This should then allow the business, once it is fully operational again, to resume trading without incurring a loss in the intervening period.

• fire or terrorist attack that destroys your business premises;
• fire, burst water main, storm, flood that causes damage to your business premises, plant or equipment;
• breakdown of your essential business equipment;
• theft of your essential business equipment;
• damage to, or destruction of, the premises of one of your key suppliers or customers;
• one of your suppliers is unable to provide the goods – e.g. piracy of the goods in transit from abroad;
• one of your key outsourcers fails to provide the contracted service;
• your employees are unable to get to your business premises; or
• virus attacks, hackers or other cyber risks causing your business’s computer system not to work.

When and what payments can I claim?

You can make a claim under your business interruption policy if any of the above events (provided it is included in your policy) happen and as a result of which you are unable to continue trading at the same level as before the event.

The actual amounts you can claim will again depend on the terms of the policy but often one or more of the following will be claimable:

• the difference between your actual profit and expected profit after your ability to do business is interrupted;
• the lost income as reduced by any variable costs that you save;
• any additional or increased costs of running your business as a result of the event, e.g. costs of moving to a temporary location, costs of operating from a temporary location, extra accountants’ fees, employing additional staff;
• fixed operating expenses, e.g. rent and utilities, and other costs still being incurred;
• loss or damage to accounting records such that you are unable to recover customer debts.

The amount payable under the claim will be based on the terms of the policy and this will vary from policy to policy and also on the event that has caused the loss.  Policies will often have a term that means the amount payable will not be based on the last set of accounts but will be based on these accounts taking into consideration any increasing or decreasing business trends over a certain period.  For example if your business is currently growing by 10% per annum then this will be taken into consideration and the amount payable increased by 10% per annum over the period concerned.  Alternatively if your business is contracting at 5% per annum the amount payable will similarly be reduced by 5%.

Alternatively the policy may set a specific amount payable for each day that your business is unable to trade.  This type of cover will often have a short period over which it is payable of, say, three months.

Would your business survive if disaster strikes?

It is sad but many small businesses that suffer a crisis, either directly or indirectly, are unlikely to be trading one year on.  This reflects the fact that small businesses often do not have the money to cope with disasters.

When a disaster strikes, your business may not be able to trade for more than a year. Even if it is up and running within a year you may have already lost a number of your key customers in that period and getting them back may take a long time.

Your business needs to resume trading as soon as possible after a disaster and business interruption insurance may help in this as it will provide income whilst you are unable to trade.  This should cover your ongoing fixed costs as well as any lost profit and additional costs incurred whilst you get back up and running.