What is business interruption insurance and do I need it

Our lives are full of different insurance products, and we might think that we’ve got them all covered, but that is not necessarily the case. Once your car, your home, your pets and your lives are covered, you then need to turn your thoughts to work. Insurance for your business premises and stock and employment liability is a must, and you would be forgiven for thinking that you have every type of insurance that you need, but have you thought about business interruption insurance?

Business interruption is the insurance policy you need to pay your expenses if your business is forced to temporarily close. It is different from buildings insurance, which only covers physical damage, and covers the income you would have received if an incident such as a fire, flood or similar disaster occurs. Take a look to find out if this kind of cover is something that your business needs and whether it covers all eventualities. 

 

What is business interruption insurance?

None of us wants to consider the thought of our business being closed, but the recent COVID-19 lockdowns have made it a much more real consideration. Whilst coronavirus restrictions meant that there was government help available, this will not be the case if you have to close your business for any other reason. 

You might be forced to close due to faults with your premises or technology, a health and safety related issue, supply problems, or a major disaster, and there is no knowing how long you are unable to trade for.

Business income interruption coverage has been designed to help with operating expenses during the period of restoration. It includes lost net income which is based on financial records, mortgage, rent or lease payments, loan payments, taxes and employee payroll. These are all vital expenses that you need to keep on top of if your business is closing on a temporary basis, and many businesses simply do not have the cash in the bank to cover this. 

There are also options that can be added to your business interruption policy if you need them. The contingent business interruption insurance (or dependent properties) will cover you if a non-owned property is damaged or destroyed and affects the business owner’s earnings. If supply chains are disrupted, there can be additional expenses as a result. There is also extra expense insurance which will cover extra expenses beyond the normal operating expenses. This can include the renting of a temporary place of business while the original one is restored, the replacement of hardware, technology and furniture, paying overtime to existing employees or hiring additional ones, and leasing equipment.

Civil authority coverage applies when the national or local government prohibits access to your premises as a result of damage to a nearby property. A utility services endorsement extends your coverage to apply to a suspension of operations if basic utilities such as water, gas or electricity are disrupted. This might be the case if the wind has broken a power line or a water pipe breaks.

Will it work for my business?

When choosing business interruption insurance, you will need to pay close attention to the policy wording to make sure that it works for you. You will need to consider how long the policy will cover you; is it limited to just a few days, or will you need a longer period to recover from a major disaster? Many policies will include a restoration period that helps to pay for lost income while the business is restored, and this is typically limited to 30 days.

A business interruption policy will usually combine property, liability and business income coverages and is suitable for small to medium-sized businesses. You should be aware that whilst these policies are very comprehensive, they often do not cover broken items such as glass, flood or earthquake damage, undocumented income, utilities and pandemics and viruses. It is therefore vital that you pay close attention to any policy that you take out to make sure you are as protected as you need to be.

When deciding how much business income insurance you need, you should take a look at your business’s gross earnings and projections to work out what your future profits might be. The cost of this insurance will vary depending on the industry that you work in, for example, restaurants are considered higher risk than estate agents because of an increased risk of fire and greater difficulty in relocating.

The number of employees that you have is also important, as the insurer will need to consider how much they are likely to have to pay in wages. The amount of coverage that you need and any previous claims that you might have made are also taken into consideration. Location is also a factor in these policies, particularly if you are in an area that is at high risk of natural disasters.

Business interruption coverage can be a lifesaver for many, but like any kind of insurance, it does have its limitations. It is important to remember that if you take this cover out as part of a commercial property policy, it will only extend to events delineated in the core coverage.

For example, if the property insurance does not cover flood damage, the business owner cannot receive business interruption cover in the event of a flood. You should also consider whether it is an expense that you really need. If your business runs from a laptop that can be set up anywhere, it will be easy for you to relocate and your income is less likely to be interrupted, so this kind of policy is less necessary.

Your business is not just responsible for your livelihood, but also for those you employ. It is therefore important that you do everything you can to protect it if something unexpected were to happen. Business interruption insurance is the lifeline that you need to keep your business afloat even when you are not able to operate and can be the difference between getting back on your feet and not.

Nannette Kendrick
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