Business interruption insurance

Business interruption (BI) insurance covers lost income when an insured event stops you from trading. If a fire destroys your shop, a flood closes your warehouse, or a burst pipe shuts your restaurant for weeks, BI insurance pays the money you would have earned while you recover.

It is not a standalone policy. BI insurance sits alongside a material damage policy (buildings, contents, or stock insurance) and only pays out when there is a valid claim under that underlying policy. This connection is called the material damage proviso and it is one of the most important things to understand before you buy.

What business interruption insurance covers

A standard BI policy pays your gross profit during the period you cannot trade normally. Gross profit in insurance terms means your turnover minus your variable costs (the costs that stop when you stop trading, such as raw materials or stock purchases). It includes:

• lost revenue -- the income your business would have earned had the event not occurred
• standing charges -- fixed costs that continue even when trading stops, such as rent, business rates, loan repayments, and insurance premiums
• employee wages -- if included in your sum insured, covering staff salaries so you can keep your team together during the shutdown
• increased cost of working -- extra expenses incurred to keep trading from temporary premises or with hired equipment

The policy does not cover net profit alone. It replaces the full gross profit so that your business can meet its ongoing obligations while it recovers.

Key concepts you need to understand

The material damage proviso

BI insurance only triggers when you have a valid material damage claim. If your building is damaged but you did not insure the building (or the specific peril, such as flood), your BI policy will not pay out either. Before purchasing BI cover, check that your underlying property insurance covers all the perils likely to affect your premises -- fire, flood, storm, escape of water, impact damage, and theft.

The indemnity period

The indemnity period is the maximum time the policy will pay out after an insured event. You choose this when you buy the policy, typically 12, 24, or 36 months. This is one of the most critical decisions you will make.

Many businesses underestimate how long recovery takes. Rebuilding commercial premises after a serious fire can take 18 to 24 months, factoring in insurance assessment, planning permission for any changes, contractor availability, building work, refitting, and restocking. If your indemnity period is only 12 months, the policy stops paying before you reopen.

Practical guidance: for premises-based businesses, choose at least a 24-month indemnity period. If your premises are listed, in a conservation area, or require specialist fit-out, consider 36 months. The premium difference between 12 and 24 months is relatively small compared to the risk of being uninsured during the final months of recovery.

The sum insured

Your sum insured should reflect your gross profit projected forward over the full indemnity period. This is not your current annual profit -- you need to estimate what the business would have earned during the recovery period, accounting for expected growth.

Calculate it as:

1. Take your annual turnover
2. Subtract variable costs (cost of goods sold, raw materials, casual labour that would cease)
3. The result is your insurable gross profit
4. Multiply by the number of years in your indemnity period
5. Adjust upward for expected growth

If you want to keep paying staff wages during the shutdown (which most businesses do, to retain skilled employees), include the full wages bill in your sum insured. Some policies treat wages separately, allowing you to choose how many months of wages to cover.

Common mistakes when calculating cover

The two most frequent causes of under-insurance are:

• Using net profit instead of gross profit -- this leaves standing charges uncovered, meaning you cannot pay rent or loan repayments during the shutdown
• Choosing too short an indemnity period -- a 12-month period may seem adequate, but it rarely covers a full rebuild. Even finding temporary premises can take months

If you are under-insured, the insurer may apply average (proportional reduction). For example, if your actual gross profit is twice the sum insured, the insurer may only pay 50% of your claim.

Extensions worth considering

Standard BI policies cover loss from damage to your own premises. Extensions widen the cover to include events outside your direct control. Not all extensions are available on all policies, and some carry additional premium, so discuss your needs with your broker.

Supplier and customer dependency

If a key supplier's premises are damaged and they cannot supply you, or a major customer is hit and stops ordering, this extension covers your resulting loss of income. Particularly important if you rely on a single supplier or a small number of large customers.

Denial of access

Covers loss when you cannot reach your premises because the surrounding area is cordoned off -- for example, after a gas leak, structural collapse of a neighbouring building, or a police incident. Your own premises may be undamaged, but you cannot trade.

Loss of attraction

If damage near your premises reduces footfall and your revenue drops as a result, this extension covers the difference. Most relevant for retail and hospitality businesses in shopping centres, high streets, or tourist areas.

Prevention of access by order of authority

Covers loss when a public authority (police, local council, fire service) prevents access to your premises. This is distinct from denial of access and specifically covers situations where an authority formally orders closure or exclusion.

Utilities failure

Covers loss when an external utility (electricity, gas, water, telecommunications) fails for an extended period, preventing you from trading. Standard policies often only cover this if the failure lasts beyond a specified period, commonly 24 or 48 hours.

Post-COVID lessons: the FCA Test Case

The COVID-19 pandemic triggered thousands of BI claims from businesses forced to close by government order. Many insurers rejected claims, arguing that pandemic closures were not covered. The Financial Conduct Authority (FCA) brought a test case to the Supreme Court to resolve the key coverage disputes.

In The Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1, the Supreme Court ruled in favour of policyholders on several important points:

• Disease clauses -- where policies covered disease occurring "in the vicinity" of the insured premises, the Court held that COVID-19 satisfied this requirement
• Prevention of access clauses -- the Court interpreted "inability to use" broadly, covering businesses that were forced to close by government regulation even where premises were undamaged
• Causation -- the Court rejected the argument that no single case of COVID-19 caused the government restrictions, finding that each case contributed to the insured peril

What this means for you now: most commercial BI policies issued since 2021 contain explicit exclusions for pandemic, communicable disease, and government-ordered closure related to public health emergencies. Before purchasing a BI policy, read the exclusions carefully and ask your broker specifically about:

• disease and communicable disease exclusions
• government action or civil authority exclusions
• denial of access wording -- does it require physical damage nearby, or does it also cover non-damage events?

Sector considerations

Retail and hospitality

Premises-dependent businesses should ensure their BI policy includes stock spoilage cover (particularly for perishable goods if refrigeration fails during a shutdown) and loss of licence cover (legal costs to defend your premises licence if an insured event triggers a licensing review). Seasonal businesses should declare their peak trading periods so the policy accounts for higher revenue during those months.

Manufacturing

Consider a machinery breakdown extension alongside standard BI cover. Standard property policies may not cover mechanical or electrical breakdown, only external damage. If a critical machine fails and takes months to replace, BI with machinery breakdown extension covers the lost production. Include increased cost of working to cover subcontracting production to a third party during the repair period.

Professional services

If your business can operate from any location with a laptop and internet connection, your BI exposure is lower than a premises-dependent business. You may still need BI cover for loss of IT systems (covered under cyber insurance) or denial of access to specialist equipment, but the indemnity period and sum insured can often be lower.

How this connects to your wider insurance programme

BI insurance does not work in isolation. It depends on your material damage policy and interacts with other cover:

• Buildings and contents insurance -- your BI claim can only succeed if the underlying damage is covered by your property policy. Check both policies cover the same perils
• Cyber insurance -- many cyber policies include their own business interruption element for system outages and data breaches. Check whether your standalone BI policy also covers cyber events, or whether there is an overlap or gap
• Insurance Act 2015 -- under the duty of fair presentation, you must disclose all material facts when arranging cover. If you under-declare your turnover or fail to mention a relevant risk, the insurer may reduce or refuse your claim

Review your BI cover at each renewal. As your business grows, your gross profit increases, and your sum insured needs to keep pace.