If you own a business, there are multiple things that can go wrong. And many of them, you can’t prepare for or predict. If there’s a catastrophic disaster and the business is unable to operate, it’s not going to be making money.

That’s where business interruption insurance kicks in. But what is it, and when would you need it?

What is business interruption insurance?

Business interruption (BI) insurance, sometimes called business continuity insurance, has been designed to help a business survive a loss of profit after being forced to stop trading for a length of time. While this is generally after a disaster such as an earthquake or flood, there are other scenarios too.

BI insurance aims to ensure that there is no loss in financial position to the business due to the event.

Do you need business interruption insurance?

If you can’t access your workplace, if your staff can’t work or you are forced to cease trading for a period of time, then you are left powerless. Not many businesses have unlimited funds in their bank account that allow them to still pay wages and costs without having any output or supplying clients with their product.

As with all insurance, it should give you peace of mind, knowing your business will survive in a situation where it otherwise may not.

What does business interruption insurance cover?

Each policy is different. It should realistically cover you for three things.

1) The income you would have made, based on your previous financial records, if the problem or disaster hadn’t happened. It will take things like electricity and other operational expenses into account.

2) Any additional costs of running your business due to the disaster.

3) Claim preparation costs which are incurred when preparing a claim for BI.

Read the policy thoroughly and you should make sure you’re happy with what’s provided. Consider:

· Does the insurance cover time while your premises are being repaired?

· What happens if all your customers businesses are closed also?

· If your business hasn’t sustained damage but you can’t access it due to a government-imposed cordon?

· What if your loss is due to a supplier unable to meet their requirements due to disaster?

· Are you covered for loss due to public and private gas, water and electric utilities?

What happens if there are a series of ongoing events?

· When does cover start? From when trading stops, or when the damage happens?

· Does it pay for additional expenses in the interim? Things such as a temporary business lease or extra costs to move?

· Are wages, severance or redundancy payouts covered?

· Are fines or damages covered?

Three things to consider that are specific to BI are indemnity periods, uplift, and depopulation.

Depopulation is the outcome when the people and customers all leave an area- if there are significant and ongoing roadworks in the area, for example. It’s not likely to be covered. After Hurricane Katrina, insurers said that the loss in turnover was due to depopulation, not damage.

The indemnity period is how long the BI policy will be in effect. In general, it’s about twelve months. This may seem like a long time but if premises need to be rebuilt, then it’s unlikely it will be long enough. It also can catch people out—for instance, if a business continues trading after the catastrophe and plans to shut down and utilise their insurance while the building is repaired. They may find by the time they get to this stage, the 12-month period has expired. Policies will differ on this and it’s important to think about. Can you find stock in that period? Repair machinery? Replace records? Maintain your market share?

Uplift is when a businesses finances show that it has been growing, and the business owner seeks to have a pay-out consistent in line with that growth. If the insurer is to agree, then the business owner must prove that this is the case, with at least two years of accounts supporting their claim.

Who should you talk to about this?

There are specialised insurance brokers who deal with business insurance, and they can also help if and when a claim is made. If you wish to do it yourself, lawyers can help you interpret policies and help at claim time too.

Take plenty of time to get a range of insurance and read through them all thoroughly. Get professional advice and make sure it covers what you think it does. Because you don’t want to be caught out when something happens and you find you’re not covered for it.