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Business interruption insurance – for when your income is, well, interrupted
If disaster strikes, business interruption insurance means you can keep on making money while you get back on your feet.
Key takeaways
- If you need to shut down or scale back for a week, month or even longer, business interruption insurance can offer a financial safety net.
- It's right there in the name: it can cover you for loss of income due to an insured "event" that impacts your ability to earn income.
- Your payout can cover the increased costs of operating, or even pay for wages and rent if a catastrophic event occurs.
What is business interruption insurance?
Business interruption insurance is designed to protect the revenue of your business following a major disruption to your operations. It can provide a replacement for lost income and help you cover the usual expenses of running a business while it's temporarily out of action.
Business interruption insurance is not sold as a standalone product in Australia. Instead, it's available as an add-on to a commercial property insurance policy or as part of a business insurance bundle.
What does business interruption insurance cover?
Business interruption insurance covers loss of income caused by a disaster or major event like a fire, flood or outbreak near your premises. A business interruption policy will generally cover:
- Lost income. The financial benefit covers your loss of earnings while your business is interrupted or can't run at full capacity.
- Ongoing expenses. It can cover fixed running costs like rent, utilities, loan repayments and employee wages.
- Increased cost of working. It can pay for any additional expenses incurred to keep the business running while you work to recover. For example, it could cover the cost of temporary premises or equipment hire.
What business interruption insurance doesn't cover
Business interruption insurance won't cover everything. It usually has a range of exclusions for things like:
- Damage, losses or disruptions from events not listed in your policy
- Disruptions that result from damage to someone else's property
- Physical damage to your property (covered by property or asset insurance)
- Business downtime caused by staff absence
- Disruption related to utilities or utility outages (unless you have a special extension added)
- Costs incurred before you made the claim
Business interruption insurance in Australia
Business interruption insurance paid out over $5 billion in natural disaster-related claims between 2019-2022 according to data from the Insurance Council of Australia. ABS data revealed that La Niña weather events and the COVID-19 pandemic were among the biggest contributors to these claims.
The Australian Business Roundtable estimated the total cost of natural disasters to Australia's economy at $38 billion per year by 2050.
COVID-19 and business interruption insurance
COVID-19 and the resulting lockdowns caused unprecedented disruption to many Australian businesses. However, the Insurance Council of Australia successfully argued before the High Court of Australia in late 2021 that many business interruption policies did not cover pandemic-related losses. This came down to an interpretation of the Quarantine Act 1908 and the exclusion of diseases listed under it.
The result was that many businesses that thought they were covered for pandemic disruption were unable to make a successful claim. If pandemic cover is a concern for your business, you should check your policy or ask your insurer carefully whether this is covered.
Business interruption insurance in action
To see how business interruption insurance might work in practice, let's imagine two scenarios:
Scenario 1: A small engineering firm is destroyed in a fire. It takes 8 months to complete repairs. The company had monthly revenue of $150,000 and monthly expenses (including wages) of $90,000. The claim would cover the cost of:
- Revenue lost = 8 months x $150,000 = $1.2m
- Ongoing expenses (rent, wages, utilities) = 8 months x $90,000 = $720,000
- Any additional costs incurred to keep the business running
- Total claim = $1.92m
Scenario 2: A tourist company's operations are halted for 3 months due to a major flood. It earns $80,000 per month in revenue. Monthly expenses are $40,000. The claim would cover:
- Revenue lost = 3 months x $80,000 = $240,000
- Ongoing expenses (wages, loan repayments) = 3 months x $40,000 = $120,000
- Any additional costs incurred to keep the business running
- Total claim = $360,000
How much does business interruption insurance cost?
The cost of business interruption insurance will vary depending on a range of factors related to your business and how it operates. Key factors affecting premium pricing include:
- Business type and industry. Businesses in industries considered "high risk" (like manufacturing and construction) will generally pay more.
- Business size. Larger businesses or those with higher revenues will typically face higher premiums.
- Location. Businesses in areas prone to natural disasters (like floods and bushfires) will typically pay more.
- Sum insured. The more coverage you need, the higher your premium will be.
- Indemnity period. This is how long your coverage lasts following the event. Longer indemnity periods result in higher premiums.
How do I calculate my business interruption insurance?
To make sure you have enough coverage, you'll need to work out the maximum amount you would need if your business was disrupted. The key calculation is:
- Gross profit = Revenue - Direct costs of producing goods or services
- Annual gross profit x Indemnity period (in years) = Business interruption insurance cover
For example, a business with a gross profit of $200,000 per year and a 12-month indemnity period would need cover of $200,000. An 18-month indemnity period would mean $300,000 of cover. A 24-month period would mean $400,000.
You also want to account for any expected business growth during the indemnity period. This is because if your business was on a growth trajectory when it was disrupted, you'll want your insurance to reflect future lost income, not just historical revenue.
How do I make a business interruption claim?
Once you've determined that your business has suffered a qualifying loss, you should notify your insurer as soon as possible and get the claim process started.
Most insurers will require you to:
- Document the disruption and its effect on your operations in detail
- Document the physical damage to your property (if any)
- Provide financial records to demonstrate the impact of the disruption on your revenue
- Keep a record of any additional expenses incurred to keep the business operating
Once you've submitted your claim, the insurer will investigate it and determine how much you're entitled to under your policy. Be aware that some insurers may try to minimise the amount they pay out, so it can help to hire a loss assessor to manage the claims process on your behalf.
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Sir / Madam
In above example of BI claim it is mentioned that-
Less any savings made: Rent on damaged premises
Why does only rent considered as a savings but any other expenses e.g. utilities.
Regards,
Guru
Hi Guru,
Thanks for your question. finder.com.au is a comparison service and not an insurer. The example used was very basic and only included rent. Savings may sometimes include maintenance costs, building services and utility bills but it will always depend on the policy.
I hope this was helpful,
Richard