What is business interruption insurance?

Why Business Interruption insurance may well be your most valuable asset

Business Interruption insurance is one of the most critical parts to your business cover, but it’s so often overlooked for various reasons. But if your business cannot operate – whether that’s because of a disaster, pandemic, cyber-attack, or your factory machinery breaks down – business interruption insurance is invaluable. This specific cover is your security blanket or soft landing that enables recovery and protection. Buildings, Contents, Stock and Plant & Machinery insurances are often talked about, although each are of little use if there is no business to return to after a catastrophic event.

At the time of writing (October 2023), there has just been a major fire at a multi-storey car park at Luton Airport. In terms of business interruption alone, there are many areas affected that will need the backing of robust insurance in order to ensure recovery. The car park is a business operation in itself, so without this facility money is lost, road and pedestrian diversions are in place, the meet and greet service cannot operate, and there is the huge cost of rebuilding. There will also be the expense to airlines as flights were cancelled and diverted, as well as to the recently opened rail extension to Luton, which was temporarily halted. And that’s just a very brief list of business interruption factors following one disaster or breakdown in routine.

The two overriding problems that occur when business interruption happens are that the:

• ability to earn revenue is greatly reduced or on some occasions stopped entirely and as a result…

• …every day running costs of the business go up

Having an adequate business insurance in place addresses this head-on, removing much of the financial anxiety incurred, as well as aiding with practical issues.

Discover more here.

But not all business insurance policies are born equal.

Some business interruption policies only address the basics, which means that if something happens, you’re likely to get a very basic return on a claim – and that may not be enough to get your business back on its feet, which is the sole purpose of the business interruption insurance.

This is why the best advice is to partner with an insurance broker who can forensically examine all possible circumstances and outcomes, and who regularly review a business interruption policy to make sure it’s still fit for purpose – including site visits and assessments.

The key is to engage with forward thinkers who understand consequences beyond the destruction or temporary breakdown of a physical asset – whether that’s a machine, lorry, or business premises.

Business interruption and “Indemnity Periods” – for when a rainy day becomes a full-on storm

One key thing is that Business Interruption cover injects vital cash-flow back into the business until all interruptions from the insured event have ceased. If an event occurs, while you may be able to trade on a reduced basis (or not!), Business Interruption is designed to financially support you until you’re operating as if the insured event had never happened.

We call this the “Indemnity Period” and it is critical that the right period is selected. Businesses tended to significantly underestimate how long it will take them to fully recover and plan for the best thing happening at the best time rather than what they should do….the worst thing happening at the wrong time. Howden’s Risk Management Team can offer advice on Business Continuity Planning to help you establish what indemnity period is required. And while many businesses go for the 12-month indemnity period assuming that is as much as they’ll ever require, we recommend 24-month indemnity as a minimum. Reinstatement of any damaged structure is a key example of this underestimation and underinsurance issue, where rebuild times are now (due to COVID, Brexit, Ukraine, Inflation), more than ever and where 12- months from date of loss would not be adequate to cover the rebuild yet alone the full recovery of the business. 

Gross profit – beyond the definition

A large part of forming a business interruption policy rests on the assessment and calculation of gross profit. And you may be surprised how often this is wrongly applied, which can then void your policy if you need to make a business interruption claim. While accountants have one interpretation of gross profit, the one most useful in terms of forming a vital layer of a business interruption policy takes into account those costs that in the event of interruption you’d still need to pay such as salaries, rent, and other overheads. Applying an incorrect calculation means that if business was interrupted, you are unlikely to be adequately covered.

The good news is that we can provide a tool that will help you get your gross profit sums absolutely right – which will help you avoid the issue of being underinsured.

Robust cover that makes sense

There’s also a responsibility on you as the client to do your bit before signing off on a business interruption policy. When you do engage with an insurer, it’s essential that you provide them with accurate and up-to-date information regarding the business's financial performance. This includes providing detailed financial statements and ensuring that the sum insured accurately reflects the business's current operations. The sum insured will also need to reflect any future anticipated growth of the business and for example, with a 36-month Indemnity Period, this would mean including a reasonable adjustment for the next 4 years (understanding that a loss could occur on the last day of the insurance policy). 

In conclusion, Business Interruption cover is a helpful tool for any business. We will reiterate that it’s important to work closely with your insurer to ensure that your policy matches the needs of your business and offers adequate coverage to protect against financial losses in the event of an interruption to operations.

At Howden, we work with you to analyse your business needs, and measure the possible consequences of any interruption before finding the perfect insurance provider. While lightning rarely strikes twice, floods may occur more than once, fire is a real hazard, and the wheels of industry sometimes stop turning.

We’ll regularly return to the hot topic of business interruption, but if you’d like to talk to one of our expert team today call 020 7623 5806, or come here for a quote.