What is Business Interruption Insurance?

Business interruption insurance (BI) covers the financial losses a business suffers when it cannot trade normally due to an insured event. While property insurance covers the cost of repairing physical damage, BI insurance covers the ongoing costs and lost profits during the period it takes to get back to normal operations.

BI insurance is not a standalone policy. It is almost always an add-on to a material damage policy (property insurance) and only pays out when the underlying property claim is valid.

What Business Interruption Insurance Covers

BI insurance typically covers:

The exact basis of cover depends on the policy wording. The two most common approaches are:

Gross Profit Basis

Covers the reduction in gross profit during the indemnity period. Gross profit for insurance purposes is defined as turnover minus specified variable costs (sometimes called “specified working expenses”). This is the most common basis for commercial BI policies in the UK.

Revenue Basis

Covers the reduction in revenue (turnover) regardless of variable cost savings. This is less common and usually more expensive.

Key Policy Terms

Indemnity Period

The indemnity period is the maximum length of time the policy will pay out for, starting from the date of the insured event. Common indemnity periods are:

• 12 months — Suitable for businesses that can recover quickly
• 24 months — The most common choice for small and medium businesses
• 36 months — Recommended for businesses with complex supply chains, specialist premises, or planning permission requirements

Choosing too short an indemnity period is one of the most common mistakes. If rebuilding takes longer than expected, the policy stops paying even though the business is still affected.

Excess Period

Most BI policies have a time excess (sometimes called a waiting period) rather than a monetary excess. The policy does not cover losses during the first few days, typically 48 to 72 hours, after the event.

Sum Insured

The sum insured should reflect the gross profit your business expects to earn during the indemnity period, plus a margin for growth. Underinsuring triggers the average clause, which means the insurer pays out proportionally less than the actual loss.

What Triggers a BI Claim?

BI insurance only pays out when there is an insured peril under the underlying material damage policy. Common triggers include:

• Fire — The most frequent cause of BI claims in the UK
• Flood — Including both river flooding and burst pipes
• Storm damage — Wind, rain, and related weather events
• Theft — Where damage to the premises prevents trading
• Explosion — Gas leaks or industrial accidents
• Impact damage — Vehicles or aircraft striking the premises

Some policies also cover:

• Denial of access — When the premises are undamaged but inaccessible due to damage nearby
• Supplier or customer extensions — When a key supplier or customer suffers an insured event that affects your business
• Utilities failure — Loss of power, water, or telecommunications

What BI Insurance Does Not Cover

• Losses from events not insured under the material damage policy
• Normal business fluctuations or market downturns
• Losses caused by pandemics (most standard policies now explicitly exclude this following the Covid-19 test case)
• Losses where the business was already in financial difficulty
• Deliberate acts by the policyholder

How a BI Claim is Calculated

BI claims are among the most complex in commercial insurance. The calculation involves:

1. Establish the standard turnover — What the business would have earned during the interruption period if the event had not occurred, based on previous years’ figures adjusted for trends
2. Deduct actual turnover — Subtract whatever revenue the business managed to generate during the interruption
3. Adjust for variable costs — Costs that stopped during the interruption (e.g. raw materials) are deducted
4. Add increased costs of working — Extra expenses incurred to reduce the interruption (e.g. temporary premises), provided they do not exceed the loss they prevent
5. Apply the indemnity period — Only losses within the agreed indemnity period are covered

Example

A retail business insured for 24 months suffers a fire that closes the shop for 8 months:

• Standard annual turnover: £500,000
• Actual turnover during closure: £50,000 (online sales)
• Saved variable costs: £80,000 (stock, casual staff)
• Increased costs of working: £30,000 (temporary storage, delivery costs)
• Claim: (£500,000 x 8/12) - £50,000 - £80,000 + £30,000 = £233,333

In practice, insurers appoint loss adjusters to verify the claim, and businesses often engage their own loss assessors to negotiate on their behalf.

Who Needs Business Interruption Insurance?

Any business that depends on physical premises, equipment, or key supply chains should consider BI cover. It is particularly important for:

• Retail businesses — Where loss of shop access directly stops revenue
• Manufacturers — Where specialist equipment takes months to replace
• Hospitality — Hotels, restaurants, and pubs with fixed overheads and seasonal peaks
• Professional services — Where a fire or flood at the office disrupts client work

BI insurance is not a legal requirement like employers’ liability insurance, but it can be the difference between a business surviving a major incident and closing permanently.

Cost of Business Interruption Insurance

Premiums depend on:

• The sum insured (expected gross profit over the indemnity period)
• The indemnity period chosen
• The industry — Higher-risk sectors pay more
• The premises — Construction type, fire protection, location
• Claims history — Previous claims increase premiums
• Extensions — Denial of access, supplier extensions, and other add-ons

For a small office-based business, BI cover might cost £100 to £300 per year. For a manufacturer or restaurant, premiums can run into thousands.

BI Insurance and Your Accounts

• Premiums are an allowable business expense for Corporation Tax or income tax
• Claim payouts are taxable income because they replace lost profits
• The payout appears in the profit and loss account as other operating income
• Any increased costs of working reimbursed by the insurer offset the corresponding expense

Maintaining accurate accounting records before and after an incident is essential for supporting a BI claim. Insurers need detailed financial evidence to verify the loss.

Related Insurance

• Public liability insurance — Covers injury or damage to third parties
• Professional indemnity insurance — Covers claims of professional negligence
• Key person insurance — Covers loss of a critical individual
• Employers’ liability insurance — Legal requirement for businesses with employees