Business interruption insurance: a guide for small businesses

When disaster strikes, business interruption insurance can be crucial to keeping your business going. Get the lowdown on how it could protect your small business here.

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Business interruption insurance can be crucial for keeping a business going when the worst happens – whether that’s a fire that ravages your office, or a flash flood that takes out your distribution centre.

However, it’s also one of the least understood types of business insurance, with many business owners unaware of how it could help them.

Thankfully, we’re here to help. This in-depth guide will give a detailed explanation of business interruption insurance, addressing the following areas:

What is business interruption insurance?

In a nutshell, business interruption insurance covers the financial consequences of serious events like floods, fires, and break-ins.

Of course, policies like contents and building insurance will cover the cost of replacing stock and repairing premises, but business interruption insurance will cover the longer-term impact of these potentially catastrophic events, the loss of business while you make do from temporary premises, and the potential loss of key suppliers and clients.

For many businesses, business interruption insurance can be the difference between going on or going under when the worst happens.

Do I need business interruption insurance?

To work out whether you need business interruption insurance, you have to think about how you’d cope if disaster struck.

If faulty wiring caused a fire that ravaged your warehouse, or a water main burst and ruined your office, or vandals destroyed your store, would your business survive?

The answer will depend on your business. A sole trader operating a digital business from a laptop would be able to get going again very quickly. But for mature businesses with stock and valuable equipment, the situation is very different.

Your buildings and contents insurance would only go so far. Once the claim has been accepted and paid, you should be able to afford to replace everything you’ve lost, but this process takes time.

And, even when your business hits a wall like this, costs keep coming. Rent payments, payments to suppliers, wages, taxes – the world doesn’t stop just because your business has. If you’re hampered for a significant period of time, both your clients and suppliers will have to look elsewhere. Loyalty only goes so far in business.

For companies up and down the UK, business interruption insurance offers crucial protection, ensuring that their lost profit and extra expenses are covered if the worst happens.

Put simply, it can be the difference between recovering, and going out of business altogether.

What events does business interruption insurance cover?

As Rick Smith, managing director of insolvency specialists Forbes Burton, notes: “Most business owners think their business interruption insurance will cover them for any scenario. Indeed, they may not have even asked or been told about specifics”.

Needless to say, you won’t be covered for every scenario.

The range of events covered by business interruption insurance depends always on the particular policy, but the events most commonly covered include:

  • Fire
  • Flooding (although details can vary: some policies will cover flooding due to a burst water main, but not a river bursting its banks, for example)
  • Storm damage

Other events that may be covered include:

  • Vandalism
  • Cyberattacks
  • Equipment failure
  • Failure of public utilities

As covered in detail above, you may also be covered for the impact of infectious diseases like the coronavirus, but the limitations of this cover depend on the wording of the policy.

Some insurers, such as Hiscox, provide detailed guidance on what is and isn’t covered online, while others will only give you this information if you contact them directly.

A word of warning – don’t assume that the potential impact of these types of dangers are covered by your other business insurance policies.

As Michael Foote, the founder and managing director of insurance comparison site Quote Goat notes: “Unfortunately, too many businesses incorrectly believe that their building or contents insurance will keep them covered and solvent in the event of an interruption.”

These policies will cover the loss of stock/equipment, and the cost of repairing damage to the premises, but will not cover the potentially severe financial impact of your business being disrupted.

For that, you need business interruption insurance.

What isn’t covered by business interruption insurance?

According to guidance from the Chartered Insurance Institute, the following are standard exclusions in business interruption insurance policies.

  • Riot or civil commotion (although this can be covered with the payment of an additional premium)
  • War risks
  • Radioactive contamination/explosive nuclear assemblies
  • Terrorism (although this can be covered with the payment of an additional premium)
  • Pollution or contamination
  • Property insured under a marine policy
  • Property that’s covered under another insurance policy

Additionally, business interruption insurance won’t cover short interruptions like power outages, or partial interruptions that require companies to scale back operations.

The risk of not having business interruption insurance

You only need to look at a few examples of business interruption insurance claims to see how valuable this insurance can be.

Morgan Clark lists two claims on its website: one for a steel processing firm in Doncaster, and one for an electronics company in Buncefield.

The steel processing firm suffered a flood at their premises and claimed a total of £630,000 – this covered the cost of moving the company to a new warehouse, and a loss of turnover.

The electronics company had its business disrupted by an explosion, and claimed for a total of £1.8m – again, this covered the cost of relocation, a fall in turnover, and emergency funding to maintain cash flow.

With this support, both companies were able to quickly recover from these significant blows.

<>Working out your business interruption insurance indemnity period>When working out what you need from a business interruption insurance policy, picking the right indemnity period is crucial.

In short, this is the maximum length of time after an event like a fire or a flood that you’ll be covered for, – as such, you need to honestly think about how long it would take you to recover from a major incident that destroyed your premises and/or stock.

One year (12 months) is pretty standard, but some businesses might need longer, either because they have specialist equipment that would take a long time to replace, or simply because they want the extra assurance that a longer indemnity period provides. In these cases, look for a policy that has an indemnity period of 24 or even 36 months.

While it may be tempting to keep the cost down by choosing a short indemnity period, you do not want to be left in the situation where your indemnity period lasts for a year, but it takes you much longer than this to rebuild your business, and you only get part of the money that you really need.

What is the material damage proviso?

A material damage proviso is a standard part of a business interruption insurance policy, but don’t be alarmed by this bit of jargon.

It’s just a fancy way of saying that to claim on your business interruption insurance, you need to first successfully claim on your buildings or contents insurance for the physical damage to your premises and/or stock.

So, make sure you have insurance in place that covers how much it would cost to repair your business premises and replace your stock – otherwise you might be left high and dry if the worst happens.

It’s for this reason that business interruption insurance is often sold alongside buildings or contents insurance, and it can make things easier if you take all three through the same provider.

<>Comparing business interruption insurance quotes>When considering business interruption insurance cover, make sure you get a range of quotes from a variety of providers. After all, you need to know what the options are to make the right choice for your business.

You will need to have a good idea of how long it would take, and how much it would cost, to rebuild your business after a catastrophic event like a fire or a flood, and ensure that you choose a policy that meets these requirements.

Once you’ve got a number of quotes, carefully examine them in relation to one another: how do they differ? And, if one is significantly cheaper, try to work out why this is.

As ever, if there’s something you don’t understand, make sure to ask – insurers are competing for your business, and should be keen to explain any points you’re not clear on.

While this will all take a bit of time, it’s absolutely worth it. Finding the right business interruption insurance cover for your business means you’ll have a vital safety net in place for when disaster strikes.

Written by:
Alec is Startups’ resident expert on politics and finance. He’s provided live updates on the budget, written guides on investing and property development, and demystified topics like corporation tax, accounting software, and invoice discounting. Before joining, he worked in the media for over a decade, conducting media analysis at Kantar Media and YouGov, and writing a wide variety of freelance pieces.
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