What is business interruption insurance and why do you need it?
You might be using business insurance to cover the costs of damage to property or claims from the public, but have you protected yourself from loss of income?
Business interruption insurance is probably one of the most misunderstood forms of business insurance you can get.
The reason is, businesses will invest in products like commercial property or contents insurance, and they assume that these will cover them from losses if their building is damaged by flooding, or their equipment is damaged. And they will.
If your office is damaged by an environmental disaster, you’ll be able to claim the costs of any damage. But that’s just the cost of the damage.
What about the potential loss of income you might suffer if the damage or circumstances mean your business has to stop operating?
This is when business interruption insurance comes in. It helps protect and replace any income you would have made in the period you can’t operate following a disaster or unforeseen event/
What you need to know about business interruption insurance
Like your other business insurance costs, you can claim interruption insurance as a legitimate expense so you do have some tax benefits to having it.
The reason this type of insurance is usually so heavily tied to another insurance product, is because you’ll only get a payout if the loss of income is directly linked to certain circumstances or a disaster.
For example, your policy will only pay out if you can prove that your loss of income is directly linked to the damage caused to your office or equipment by flooding or a fire etc.
Most policies will cover you from the date of the initial disaster to the date any repairs have been made, or until equipment has been replaced and you’re able to start trading again at your pre-event levels.
Your income payouts will usually be based on historical financial records for your company - for example how much your business made in the same period the previous year.
Or, if you’re a newer business with less trading history, how much you’d made in the months prior to the event.
It’s important therefore that you provide accurate records to your insurance broker or provider during the application as these figures will form the basis for any payouts.
What does business interruption insurance actually cover?
Because this type of insurance is usually tied to another insurance product, you’ll get extensive cover. First is the loss of profit during the period you can’t operate.
It’s also possible that you could claim any operating costs you still incur during the time you’re out-of-business but still need to pay.
You could also claim back employee wages so you can keep paying your staff and retain them during the time you can’t trade.
You’ll be able to identify exactly what you can get cover for when you apply for your insurance policy.
What doesn’t business interruption insurance cover?
Business Interruption insurance won’t cover the costs of damage to your property or loss of equipment caused by an event.
That will be covered by a separate product like commercial property insurance. This is why interruption insurance is usually packaged with another product because it will pay out as a result of the same incident.
You also can’t claim for any undocumented income that isn’t including in your company records submitted when you buy the policy.
This is why it’s vital that you provide accurate records to ensure you’re able to claim for everything you’re entitled to.
Would business interruption insurance protect me from future pandemics?
Right now there are a number of legal cases going through the courts regarding whether businesses can claim on business interruption insurance for loss of profit during Covid-19.
Typically speaking, no you won’t be covered for these events unless strictly stated in the policy - but these are usually not included.
For Covid-19 specifically, the High Court (and later the Supreme Court) has judged that policyholders should be able to claim against Covid-19 related losses on some policies.
The Government declared coronavirus a notifiable illness, and ordered businesses to close for the duration of lockdown.
However, there are still disputes going on over the size of payouts businesses should get. But what the episode shows is that business interruption insurance is essential to protect yourself from any unforeseen events or disasters and it’s much better to be prepared than not.
Find out more about business interruption insurance
If you want to protect your business’ future profits from disaster, then get in touch with us.
We can work with you to find the right level of business insurance cover for your company based on your individual needs. Get in touch.