Business interruption insurance

Most businesses impacted by coronavirus don't have business interruption insurance, and so are not covered for loss of income. Find out what this cover is and why it's important.

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The coronavirus pandemic has caused widespread disruption to businesses all across the world and, as a result, the need to protect small business owners and self-employed people in adverse circumstances has entered the headlines.

Unfortunately, the UK does not offer pandemic insurance, as that would require a significant subsidiary from the government in order for it to be available at affordable rates. This is not something any country in the world can currently sustain.

However, a close alternative to pandemic cover is business interruption insurance. While it has certain limitations, it does offer protection from circumstances that might negatively affect the way your business operates.

What is business interruption insurance?

Business interruption insurance covers your business against loss of income caused by the closure of your business due to certain adverse circumstances specified in the policy schedule. These usually include damage to your premises by fire, flood or other disaster.

As well as cover for the closure of the business, the policy might also cover you for increased running costs or a dip in profits due to the events specified above, up to the amount agreed in the policy.

Many business owners believe taking out buildings and contents insurance for their premises provides sufficient cover for business premises. However, while this type of cover usually pays to fix the initial damage, it does not take into account the financial losses that the interruption in your trading can cause your business.

What does business interruption insurance cover?

The specifics of your business interruption policy will vary according to the agreed terms, but cover usually includes:

  • Lost revenue
  • Increased operating costs needed to maintain normal revenue
  • Increased operating costs not related to revenue
  • Professional fees to organise your insurance claim
  • Outstanding debts receivable you can’t recover due to damage to your debt records

Note you’ll only be reimbursed if those things happen because of an insured event, such as:

  • Fire
  • Natural disasters like earthquakes, storms and floods
  • Explosions, including boiler explosions
  • Theft, burglary and vandalism
  • Escaped water

In some cases, you might also be able to take out cover for loss of income caused by customers and staff not being able to access your business for reasons other than damage to the premises. This can include the police cordoning off the area for incidents such as criminal activity or risk of building collapse. Also known as “restricted access” cover or “non-damage business interruption” cover, you usually have to pay an extra premium to add this to your policy.

How much cover do I need?

To calculate how much business interruption insurance you should have, you will need to work out how much revenue you expect to make over the next year, and then identify how long you would need to rebuild your business if the worst happened. Here’s what to do:

1. Estimate how much revenue you’ll make over the next 12 months. Look at the amount you made in total sales last year, then work out how much that will increase or decrease based on market trends and business performance.
2. Imagine the worst-case scenario for your business. How long would it take you to get back on your feet if you lost all your property, including the building, stock and equipment? That’s how many months of cover you would need, which makes your indemnity period.

Your insurer will work out the cover based on the figures you give them. But basically, if you lose it all, they’ll divide the figure from step one by the number of months in step two to arrive at your total lump sum payout. This figure is your limit of liability.

If you need help estimating next year’s revenue, you can find business interruption worksheets online. Some brokers even offer online calculators that can help you.

COVID-19 and business interruption insurance

Standard business interruption policies are designed to cover standard risks. Therefore, unpredictable (and frankly bonkers) circumstances like a global plague shutting down the world’s economy are not usually included in the cover.

Certain extensions, like cover for business interruption arising from notifiable or infectious diseases, can provide protection against these types of situations. However, the diseases covered, which tend to be known and understood conditions, are usually specified, and the disease must be present in the premises for cover to apply.

This type of cover involves paying an extra premium and therefore not many businesses have it (nor is it financially viable for most businesses to take out).

According to the ABI, “An initial, working estimate in the ABI’s response to the Treasury Select Committee indicates that its members can expect to pay out over £1.2 billion in claims, £900 million of this relates to business interruption claims. While most businesses will not have purchased insurance to cover against COVID-19, for those that have valid claims, some are expected to be substantial.”

That said, as a result of the coronavirus pandemic, the FCA has started reviewing business interruption policy wording to see if more can be done to protect businesses against loss of income caused by the closure of their businesses for reasons other than damage to their physical premises.

Does business interruption insurance cover empty buildings?

Standard business interruption insurance does usually include cover for empty buildings, but this comes with quite a few conditions, mainly relating to business owners regularly attending their premises to check there are no issues or risks.

The spread of COVID-19 has led the government to advise against all but essential travel on public transport during the lockdown period. As a result, many commercial insurers have relaxed some of the restrictions on insuring unoccupied buildings, including:

  • As long as all measures are in place to protect the property, many insurers are willing to be flexible regarding how long the property specified in the policy can remain unoccupied.
  • Business owners no longer need to immediately inform the insurer if a property is left unoccupied. This is to relieve the pressure on both the business owner and the insurer’s call centre staff.
  • Business owners are not required to regularly check on the condition of their property if they are not able to do so safely.

It’s important to note insurers still expect policy owners to continue to follow risk management advice and do the best they can to mitigate potential damage to their premises by the risk of fire, theft and escape of water.

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