Business interruption insurance explained: Is BI cover worth it?

Business interruption, or BI cover, is one of the least well understood business insurance products¹ and, particularly given the controversy around BI and COVID-19 claims, some businesses will be wondering whether BI is worth the premium.²

Of course, there is no single answer to that question, because whether BI cover is worth taking out depends on the nature and circumstances of individual businesses.

For every business, decisions around whether to take out business interruption cover should start with a clear understanding of what BI insurance is, the risks it can cover, and how it works.

What is business interruption insurance?

Business interruption insurance is a cover designed to help defend your business and its finances if a serious incident – for instance a serious fire or flood affecting your business premises – disrupts its ability to trade as normal.³

You can read about business interruption insurance here, but generally speaking it is a policy that businesses will buy alongside insurances like business premises cover. In that scenario property insurance will help with the cost of reinstating premises and other assets after an insured incident, while BI will step in to replace lost revenue or profit while the business gets back to normal.²

Business interruption insurance and Brexit

Findings from our UK SME Risk Report show that the majority (56%) of the nearly 1,300 UK SMEs surveyed said they were concerned about Brexit-related risks. That’s understandable given the negative impact on staffing, supply chains⁴ and costs⁵ that has flowed from Brexit to date – especially in light of the compounding effect of the COVID-19 pandemic.

Indeed, we found that 90% of SMEs had felt the effects of Brexit – around a third (31%) reporting supply chain disruption, 22% suffering reduced trade, and a further 19% pointing to reduced cash flow.

While Brexit uncertainty continues for SMEs, it seems that many are turning to their insurance programmes to help manage and mitigate the risks – 25% are planning to change their insurance programmes in response, and 24% turning to BI to protect against the impact of Brexit.

However, that may be a misguided strategy, since most BI policies simply will not cover Brexit risks. SMEs may assume they can claim loss of revenue due to Brexit-related issues under their business interruption cover, but that is often not the case. For instance, if the loss is due to an issue affecting a supplier, a successful claim would depend on the supplier having suffered property damage – not something that would be caused by Brexit.

Business interruption insurance may be able to cover businesses in certain cases, but not without the addition of specific extensions. These extensions could cover issues like trade disruption and loss of key suppliers.

That said, even though BI is not usually the right cover for Brexit risks, decisions about whether to take out cover should look at a broader range of issues – for many businesses, it could still make the difference between survival or failure after a serious insured incident.

So, is business interruption insurance worth it?

As pointed out above, decisions around whether to take out BI comes down to the risks a business is faced with and the potential impact if something were to go badly wrong.

By way of example, let’s say a high street store, sharing a property alongside other businesses with residential flats above, suffered a serious fire leaving the building badly damaged and need of lengthy repairs.

How would that store survive if it was unable to trade for months, even years, or cover the cost of temporary premises? If the business had the right BI cover in place, it would get help with everything from lost revenue and profit to the costs of finding temporary premises – all of which would leave it much more able to survive the disruption and return to trading as normal once repairs have been completed.¹

So, when considering whether BI insurance is worth it, you need to think about the most serious incidents that could affect your business. If a fire destroyed your premises, could you carry on trading? Would your income be significantly affected? What costs might you incur that wouldn’t be covered by your property insurance? And how long might it take you to recover?

If you think an incident of that kind might seriously affect revenue or profit, or even threaten the survival of the business, then it may be worth taking a closer look at loss of profit, or BI insurance.

 

^Sources:

<sup>1. marshcommercial.co.uk/business-interruption-insurance
2. teeslaw.com/Coronavirus-business-interruption-policy
3. entrepreneurhandbook.co.uk/business-interruption-insurance
4. theguardian.com/covid-damaged-small-businesses-brexit-uk-eu-trading
5. theguardian.com/brexit-trade-barriers-added-600m-in-costs-to-uk-importers-this-year</sup>