What are the types of business interruption insurance?
Business interruption (BI) insurance can often be a lifeline to businesses after a disaster. It can help get them back on track and recover from the damage, but which cover is suitable for you? There are three main types of Business Interruption insurance:
- Loss of gross profit
- Loss of gross revenue
- The increased cost of working
Each of the covers provides the necessary recovery plans for businesses to meet the business’s needs.
Loss of Gross Profit type of Business Interruption
Loss of gross profit is a type of business interruption that covers net profit loss after a property damage claim. For example, following a fire, flood or theft claim. It is the most common choice of BI and usually in SME business insurance packages
The sum insured is the maximum amount the insurer will pay the insured following a claim. It may be referred to as the indemnity limit in some policies. The final sum insured is calculated by deducting Uninsured Working Expenses (UWEs) from turnover. These are typically variable costs. Therefore, if turnover drops after a disaster, so do these costs.
The Business Interruption sum insured can directly impact your insurance premium. However, it is important to be realistic when calculating UWEs. Incorrect values can result in underinsurance. This type of BI insurance is most suitable for those with many directly variable costs rather than service-led businesses.
Small business insurance package policies will often include a blanket sum insured limit for BI on a “gross profit” basis. Usually, this is set at a deliberately high level to avoid underinsurance. But business owners should still check its adequacy before proceeding with cover.
Business interruption calculated on a loss of gross profit basis will also have an indemnity period. This is the maximum length of time the cover will apply. Further details about the indemnity period are outlined below.
Loss of Gross Revenue type of Business Interruption
Loss of gross revenue covers the loss of turnover/income after a property damage claim. For businesses with few variable costs directly linked to turnover, loss of gross revenue is the ideal type of business interruption. To calculate the loss of gross revenue sum insured, you need to know your turnover/fee income and the length of the indemnity period as outlined below.
Loss of gross revenue is most suitable for businesses whose costs are not directly influenced by a loss of turnover. Packages often include an “Increased Cost of Working” cover. Service-led businesses can often continue to trade in some form following a property damage claim. However, continuing to operate following damages may incur additional costs to do so. Business interruption covers the impact on your income following the loss. Meanwhile, the Increased Cost of Working funds the additional costs incurred to continue to trade, as outlined below.
Business Interruption Indemnity Periods
When arranging your BI cover, you must consider how long it will take for your business to recover from a significant property damage claim. Consider this both in terms of getting the premises back up and running and returning revenue to pre-loss levels. For example, if a factory burns to the ground, there will be a time period when the business cannot operate. The property needs to be rebuilt, and machinery needs to be replaced. This may take months, even years. Then once up and running, it can take a significant time for revenues to recover to pre-loss levels.
You should select an indemnity period which is adequate for your business needs. This period should allow sufficient time to re-establish the business and its income. Typically, business interruption indemnity periods can range from 12 months to 36 months. Also, note that the BI sum insured needs to be sufficient to cover the full indemnity period. For example:
| Indemnity Period | Indemnity limit |
| 12 months | £100,000 |
| 24 months | £200,000 |
| 36 months | £300,000 |
Each business is different. You may wish to seek assistance from your accountant before setting your sum insured and indemnity period.
Increased Cost of Working
Increased Cost of Working covers additional costs incurred when a business continues to trade following a property damage loss. It relates to additional running costs incurred to maintain trading as a result of the initial loss. For example, renting temporary office space following a flood at your main office location.
The increased cost of working can be extended (or is often included) by both the gross profit and gross revenue-based business interruption policies. Equally, it can be covered as a standalone cover. The cover is subject to an economic limit, which either forms a standard extension or, if arranged separately, the limit can be tailored to your specific requirements.
The increased cost of working is suitable for businesses that are resilient to a loss. For example, businesses that can easily minimise the risk of impact on their business. As such, they only require additional money to put a recovery plan into action. Multinational Corporations (MNCs) are an example of this. For MNCs, additional cash reserves elsewhere can cover a loss in one area of the business. However, this is usually not an option for smaller operations. Although, it can be a good alternative for smaller businesses that don’t immediately depend on their premises for revenue.
For more information on the types of Business Interruption insurance, contact us. We can create your own tailored insurance cover to meet your business needs and give guidance every step of the way.
Loss of Gross Profit Type of Business Interruption
Loss of gross profit is a type of business interruption that covers the loss of net profit after a property damage claim. For example, following a fire, flood or theft claim. It is the most common choice of BI and is often included in SME business insurance packages.
The sum insured is the maximum amount that the insurer will pay to the insured following a claim. It may be referred to as the indemnity limit in some policies. The final sum insured is calculated by deducting Uninsured Working Expenses (UWEs) from turnover. These are typically variable costs. Therefore, if turnover drops after a disaster, so do these costs.
The Business Interruption sum insured can directly impact your insurance premium. However, it is important to be realistic when calculating UWEs. Incorrect values can result in underinsurance. This type of BI insurance is most suitable for those with lots of directly variable costs rather than service-led businesses.
Small business insurance package policies will often include a blanket sum insured limit for BI on a “gross profit” basis. Normally this is set at a deliberately high level to avoid underinsurance. But business owners should still check its adequacy before proceeding with cover.
Business interruption calculated on a loss of gross profit basis will also have an indemnity period. This is the maximum length of time the cover will apply. Further details about the indemnity period are outlined below.
Loss of Gross Revenue type of Business Interruption
Loss of gross revenue covers the loss of turnover/income after a property damage claim. For businesses with few variable costs directly linked to turnover, loss of gross revenue is the ideal type of business interruption. To calculate the loss of gross revenue sum insured, you need to know your turnover/fee income and the length of the indemnity period as outlined below.
Loss of gross revenue is most suitable for businesses whose costs are not directly influenced by a loss of turnover. The cover is often packaged to include the “Increased Cost of Working” cover. Service-led businesses can often continue to trade in some form following a property damage claim. However, continuing to operate following damages may incur additional costs to do so. Business interruption covers the impact on your income following the loss. Meanwhile, the increased cost of working funds the additional costs incurred to continue to trade, as outlined below.
What else do I need to know about Business Interruption?
This article is not a complete guide to Business Interruption insurance. A full explanation of this complicated insurance type could fill several books. Instead, this article provides an introduction to key areas your policy may cover. Our qualified team will be happy to talk you through the conditions of your cover over the phone.
It’s worth noting; Business Interruption cover will not cover every possible disruption. Business Interruption insurance provides cover for specific insured losses following property damage claims. For example, following a fire or flood at your premises. It does not provide cover for uninsured external events. The last few years have shed light on areas where policies were lacking in clarity on this matter.
The COVID-19 pandemic blind-sided business owners and insurers alike. The first disruptions of 2020 left thousands uncertain about their policies. However, going forward, post-COVID policies have been clarified to specify their purpose. As such, your policy will specify the interruptions covered. This will exclude future pandemic-related losses.
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