Business interruption, or BI cover, is one of the least understood business insurance products.1 Given the controversy surrounding BI and COVID-19 claims, some businesses may be questioning whether BI is worth the premium.2
There is no single answer to that question. The value of BI cover depends on the nature and circumstances of each individual business.
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 designed to help protect your business and its finances in the event of a serious incident. For instance, a major fire or flood affecting your premises can disrupt your ability to trade normally.3
You can read about business interruption insurance here. However, 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% are turning to BI to protect against the impact of Brexit.
But 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. However, 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. This type of damage is 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.
Even though BI is not typically the right cover for Brexit risks, decisions about whether to take out coverage should consider a broader range of issues. For many businesses, having this insurance could make the difference between survival and failure. This is especially true after a serious insured incident.
So, is business interruption insurance worth it?
As mentioned above, decisions about whether to take out BI insurance depend on the risks a business faces. They also consider the potential impact if something were to go badly wrong.
For example, let’s say a high street store, shares a property with other businesses and has residential flats above. If it suffers a serious fire, the building may be left badly damaged and in 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 receive help with lost revenue and profit. It would also cover 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?
An incident of that kind might seriously affect revenue or profit, or even threaten the survival of the busines. In this case it may be worth taking a closer look at loss of profit, or BI insurance.
Sources
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
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