If a fire or flood forced your business to stop trading, the repair bill might be the smaller problem; the lost income while you cannot operate could be far worse. Business interruption insurance protects that income. This guide explains business interruption insurance in plain English: what it covers, the indemnity period, and how to set the sum insured.
What business interruption insurance is
Business interruption insurance replaces the income your business loses when an insured event stops or disrupts your trading. If a covered event such as a fire or flood damages your premises so that you cannot operate normally, the policy pays for the loss of earnings while you recover, helping to keep the business afloat. It works alongside property and contents cover, which pay for the physical damage, by covering the financial consequences of being unable to trade.
Why it matters so much
The loss of income after a serious incident can exceed the cost of the physical damage itself. A business might repair its premises in months, but during that time it may have little or no income while still facing fixed costs like rent, wages and loan repayments. Without business interruption cover, those months of lost earnings come straight out of the owner's pocket, which is why many businesses regard this cover as essential rather than optional.
What triggers a claim
Business interruption cover is usually triggered by the same insured events as your property cover, such as fire, flood, storm or escape of water, when they cause damage that disrupts your trading. The interruption must generally flow from physical damage to your property from a covered event. This link to an insured event is important, because it determines when the cover responds, as our guide to business contents and commercial property insurance explains.
The indemnity period
A crucial feature is the indemnity period, the maximum length of time the policy will pay for lost income after an event, often 12, 24 or 36 months. You should choose an indemnity period long enough to reflect how long it would realistically take your business to recover fully, not just to repair the building. For many businesses, rebuilding custom and getting back to normal trading takes longer than the physical repairs, so a longer indemnity period is often wise.
Setting the sum insured
Business interruption cover is usually based on your gross profit, broadly your income less certain variable costs, rather than a simple turnover figure. Setting this sum insured correctly matters, because under-insuring can lead to a reduced payout when you most need it. It is worth calculating it carefully, and reviewing it as the business grows, so that the cover reflects the income you would actually need to replace if you could not trade.
Increased cost of working
As well as lost income, business interruption policies often cover the increased cost of working, the extra expenses you incur to keep trading or to get back to normal more quickly, such as renting temporary premises or hiring additional equipment. This can reduce the overall loss by helping you continue operating, so it benefits both you and the insurer. Check whether and how your policy covers these additional costs, as they can make a real difference.
What it does not cover
Business interruption cover responds to interruption caused by an insured physical event, so it does not cover loss of income from causes outside the policy, such as a general downturn in trade, the loss of a contract, or events specifically excluded. Notably, many policies exclude interruption from causes like disease or pandemics unless specifically added. Reading the policy to understand exactly which causes are covered, and which are not, avoids a misunderstanding at claim time.
Who needs it
Any business that relies on premises, equipment or continuous trading to earn its income should consider business interruption cover. The more a serious incident would stop you earning while costs continued, the more valuable it is. A shop, restaurant, workshop or office could all be halted by a fire or flood, as our guide to shop and small business insurance notes, and the income protection can be what keeps the business alive.
An example of the loss
Picture a busy cafe that suffers a serious kitchen fire. The buildings and contents cover pays to repair the premises and replace the equipment, but the cafe cannot trade for several months while the work is done. During that time it earns nothing, yet still owes rent and other fixed costs, and risks losing regular customers. Business interruption cover replaces that lost income through the closure, which is often what allows the business to survive and reopen.
Wider extensions to consider
Some business interruption policies can be extended beyond damage to your own premises. Options may include cover where damage at a key supplier or customer disrupts you, or where you are denied access to your premises because of an incident nearby. These extensions matter for businesses dependent on a particular supplier, customer or location. They are not always included as standard, so if such risks are significant for you, ask whether they can be added.
Reviewing the sum insured and period
Because business interruption cover is based on your gross profit and an indemnity period, both should be reviewed as the business changes. A growing business may have outgrown an old sum insured, and a longer recovery than expected can exhaust a short indemnity period. Revisiting these figures, ideally each year, keeps the cover matched to the income you would need to replace and the time you would realistically take to recover fully.
Why under-insurance bites here
Under-insurance is particularly damaging with business interruption, because the loss arrives at the worst possible moment, when you are already coping with damage and disruption. If the gross profit figure is set too low, the payout can be scaled down just when you most need it, leaving a gap that threatens recovery. Taking the time to set the figure accurately, with advice if needed, is one of the most important steps in arranging this cover.
The simplest test is to ask how long your business could survive earning little or nothing after a serious incident, while costs continued. If the honest answer is not long, business interruption cover, set to the right gross profit and indemnity period, is one of the most important policies you can hold.
In short
Business interruption insurance replaces the income your business loses when an insured event, such as a fire or flood, stops you trading, working alongside the property cover that pays for the damage. The indemnity period sets how long it pays, often up to 12, 24 or 36 months, and the sum insured is usually based on gross profit, so set it accurately. It does not cover losses from causes outside the policy.
Where to get help and next steps
Read our guides to business contents and commercial property insurance and shop and small business insurance to build the right package. This is general information, not financial or legal advice.