Business interruption insurance – protecting your business when you're forced to stop trading

Making provisions for a ‘crisis’ that would prevent you from trading is essential to the profitability and stability of any company. Most businesses operate on pretty tight margins and wouldn’t survive for very long if they were forced to stop trading for prolonged periods of time due to a fire, flood or other major emergency. Employees and suppliers still need to be paid, and if you have no income coming in, this can put your business under serious financial strain.

The purpose of business interruption insurance (or loss of profits insurance which would be a more familiar term for smaller businesses) is to restore your business to the financial position it was in before the major emergency happened. It should be considered an essential part of your continuity plan, and as it cannot be changed or altered after the disaster has occurred, it’s really important to think carefully about what eventualities you need to insure against.

Some of the key features of business interruption insurance include the following:

  • Insurance for your actual source of revenue – i.e. the products or services you sell in order to generate income. This can also include any income from renting out property or buildings that the business might own
  • The indemnity period is probably the most important aspect of this type of insurance. This is the time you estimate it will take the business to get back on its feet in the aftermath of a major emergency. When you’re working out the indemnity period, you’ll need to consider things like the time it will take to demolish and rebuild the site if there has been a fire or severe flood, the time it will take you to restock or to replace everything at your plant if you own a factory, and the time it might take to re-staff if you have had to let some people go after the event. Obviously this is going to be different for every business and it is very tricky to estimate how long this will take. There will nearly always be unforeseen delays and if you have several operational bases, then obviously this will add to the work of rebuilding. Taking this into account, most companies opt for an indemnity period of approximately two years.
  • Wages and salaries also need to be taken into consideration as will coverage for what is known as the ‘increased costs of working’ – or, the costs that will be incurred as you try and keep business coming in regardless of the stage you’re at with the rebuild.  They may include things like rent for temporary offices or equipment, or whatever else you need to have in order to remain operational.
  • In the case of a full rebuild, demolition, builders’, designers’ and architects’ fees will need to be taken into account, and as anyone in the building trade will know, they can be extremely costly.
  • Another thing to consider is that it may be the premises of your key supplier that is damaged or destroyed. For some companies, this could have just as far reaching consequences and cause major interruption.
  • No fire, no earthquake, no flood? But your entire operational system crashes and you cannot continue trading. This could quite possibly happen if machinery breaks down at a plant, or your IT system crashes and you can’t operate – at a stock broker’s for example.

As with all types of insurance, the type of cover you need will depend very much on your particular business, and no two policies will be the same. However, business interruption insurance is a little more complicated than most so you should spend as much time as you can talking through your business needs with an expert in this type of cover. If you are a smaller business this type of cover or ‘loss of profits’ insurance may already be included in property cover or as part of public or employer’s liability cover, so do check before you go ahead and buy it separately.