What is business interruption insurance?

Full answer

Business interruption insurance protects a business's income, not just its physical assets, filling a gap that standard property insurance does not cover on its own. **What it covers** If your business premises are damaged by an insured event -- commonly fire, flood, storm damage, or escape of water -- and you are unable to trade normally as a result, business interruption cover can compensate you for lost profits and certain fixed costs (such as rent, wages, and loan repayments) that continue even while you are not generating normal income, helping the business survive the disruption and get back on its feet. **It is linked to an underlying insured event** Crucially, business interruption cover generally only pays out following an event that is also covered by your buildings or contents insurance policy -- it is not a general "loss of income" policy that pays out for any reason trade slows down (such as a general economic downturn, loss of a key customer, or, in most standard policies, a pandemic, unless specific extended cover was purchased). **Indemnity period** Policies specify a maximum "indemnity period" -- the length of time the policy will continue paying out while the business recovers, commonly ranging from 12 to 36 months depending on the policy and the nature of the business. Choosing too short an indemnity period is a common mistake, particularly for businesses that might take a long time to fully rebuild or relocate after a serious event. **Calculating the right level of cover** Cover levels are usually based on your business's gross profit (or, for some smaller policies, turnover) and should reflect the actual financial impact a serious disruption would have -- underinsuring can leave a business significantly out of pocket even with a policy in place, since payouts are often proportionally reduced if the sum insured does not match the true exposure. **Who typically needs it** Business interruption cover is particularly important for businesses that rely heavily on physical premises to trade -- shops, restaurants, manufacturers, and offices -- since a fire or flood could otherwise halt income entirely for months while repairs or a move take place, potentially threatening the survival of the business. **Worked example** A restaurant suffers a kitchen fire and cannot trade for four months while repairs take place. Business interruption insurance, linked to the underlying fire damage claim on the buildings policy, compensates the owner for lost profit and ongoing fixed costs during the closure period, up to the policy limits. **Practical tip** Review your business interruption sum insured and indemnity period regularly as your business grows, since a policy based on outdated turnover or profit figures may leave you underinsured when you actually need to claim.

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