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Business Interruption Insurance

Insights for Comprehensive Cover

Business interruption insurance is crucial for safeguarding a company’s income stream following a disruptive event. Unlike other forms of insurance that primarily cover physical losses, business interruption insurance focuses on the financial impact of such interruptions, aiming to mitigate the income loss a business may experience after an insured event.

Businesses frequently face challenges with claims for business interruption due to misunderstandings around policy terms. Clarity in policy language is essential—especially around calculations, insured sums, indemnity periods, and exclusions—to prevent disputes during claims processing.

In this guide, we outline key elements that businesses should consider when arranging effective business interruption protection.

Business Interruption Insurance

Cover Scope: Protects against financial losses stemming directly from damage to the insured’s own property. Event Triggers: Activated by physical damage to the insured property from events like fires, floods, storms, or vandalism. Purpose: Aims to replace lost income and cover operating expenses during the time required to repair damage and restore normal business activities.

Common Inclusions:

• Loss of Gross Profit (based on turnover minus variable costs)
• Fixed costs (e.g., rent, utilities, payroll for essential staff)
• Additional Increased Cost of Working (AICOW) to keep operations running (e.g., renting temporary premises)

Tailoring Policies with Extensions and Clauses

Business interruption policies can include a variety of extensions and clauses that expand their scope:

• Increased Cost of Working (ICOW): Covers extra expenses necessary to maintain operations post-loss.
• Denial of Access: Provides cover if damage to nearby properties prevents access to the insured’s premises.
• Utilities Extension: Addresses income loss from utility interruptions (e.g., power, water, telecommunications).
• Alternative Premises Clause: Allows use of alternate premises during repairs, minimising operational downtime.
• Professional Accountants Clause: Covers costs of hiring accountants to support claim preparation.
• Departmental Clause: Ensures that unaffected departments do not impact the payout calculation for affected areas.

Understanding Financial Components to Prevent Underinsurance

1. Gross Profit Calculation

• Gross Profit (for insurance purposes): Typically defined as turnover minus variable costs (also known as uninsured working expenses). This ensures that cover accurately reflects the financial impact of an interruption.
• Importance: A miscalculation in insured Gross Profit can lead to underinsurance, resulting in reduced claim payouts.

2. Revenue vs. Gross Profit Cover

• Gross Profit Cover: Standard approach in the UK, focusing on loss of income based on turnover minus variable costs.
• Revenue-Based Cover: Less common in the UK but provides broader protection by covering the total income without deductions for variable costs.

3. Declaration-Linked Policies

• Definition: A flexible option where the sum insured is regularly updated based on current turnover, avoiding underinsurance.
• Benefits:
  • Aligns the sum insured with actual turnover
  • Ensures businesses are neither over – nor underinsured
• Premiums adjust based on business performance

4. Maximum Indemnity Period

The indemnity period under your business interruption policy is the maximum time that the policy will cover you in the event of an insured interruption. This is a key factor in determining your insured amount, as it must reflect the full length of the chosen indemnity period.

When selecting the period, consider the greatest amount of time it would reasonably take for your business to trade independently again, including, but not limited to:

• The time required to rebuild or repair damaged facilities, factoring in site clearance, planning approvals, and potential construction delays.
• Stock replacement delays.
• Periods when you may be unable to access your site due to actions taken by authorities.
• The time it takes to replace or repair machinery, particularly if sourced from abroad.

The chosen length of time (typically 12, 24 or 36 months) should reflect how long it will take for your business to return to the level of operation it would have been at if the loss had not happened. An overly generous indemnification period rather than one that may fall short would mitigate the risk of underinsurance should unforeseen challenges occur through the recovery period.

Cox Mahon would be happy to discuss this with you and offer guidance.

The Importance of Selecting the Right Policy

A well-structured business interruption policy is essential for effective risk management, as recent global disruptions have shown. Ensuring clarity on cover, indemnity periods, exclusions, and extensions enables businesses to make informed decisions, facilitating swift claims processing and financial stability in challenging times.

Cox Mahon has extensive experience in arranging business interruption insurance for UK businesses and access to a wide range of insurers. Our team provides impartial advice to help you select the right policy for your individual requirements.

Contact us today to ensure your business has the protection it needs.

Harrison Law, Cert CII, Head of Commercial & Private Clients, Cox Mahon