Insurables — Australian business risk, sourced and dated
Cover type

Business interruption insurance: what it covers and who carries it

Cover for lost income and additional costs when insured damage stops a business trading.

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In short

  • Business interruption pays for income lost when insured damage stops a business trading, plus the extra costs of keeping going.
  • It attaches to a property claim: no insured damage generally means no interruption claim.
  • The indemnity period, not the sum insured, is what most often turns out to be too short.

Business interruption is the cover that pays for the gap between the damage and the recovery. Property cover rebuilds the shop; business interruption pays the wages, the rent and the lost margin while the shop is being rebuilt.

It is consistently the least understood section of a business pack and the one most likely to be set at a figure nobody has revisited.

Also called: business interruption, BI cover, loss of profits

How the cover is calculated

Most policies insure gross profit as the policy defines it, which is not the accounting definition and not net profit. The figure is designed to cover the profit lost plus the continuing costs that do not stop when trading does.

Increased cost of working sits alongside it, paying for the temporary premises, the hired equipment and the overtime that get a business trading again sooner.

The indemnity period

The indemnity period is the maximum time the policy will keep paying. It has to cover finding a site, rebuilding, refitting, restocking and rebuilding a customer base — not just the construction.

A period chosen because it sounded generous, rather than because somebody worked out how long recovery would take, is the usual reason a claim runs out before the business does.

What people get wrong about it

The first error is expecting the cover to respond to a downturn. It responds to insured damage, not to lost customers, a lost contract or an economic shock.

The second is insuring turnover rather than the defined gross profit, which measures the wrong thing.

The third is ignoring damage that happens to somebody else. A supplier or a neighbouring anchor tenant being shut down can stop a business trading, and whether that is covered depends on extensions that have to be bought deliberately.

Questions

Does business interruption cover a downturn in trade?
Generally not. The cover is triggered by insured physical damage that interrupts the business. A fall in demand without damage sits outside it.
What is an indemnity period?
It is the longest time the policy will keep paying after the damage. It needs to cover the whole recovery, including refitting, restocking and winning customers back, rather than only the rebuilding.

Occupations that commonly carry it

Ordered by how central this cover is to each occupation in the graph. A pattern in the data, not a statement that any business is required to hold it.

  • Restaurant operators — Full food service, usually with a liquor licence and commercial kitchen.
  • Breweries and distilleries — Production of alcohol for sale, with excise and licensing obligations.
  • Accommodation providers — Motels, holiday letting and short-stay operation with guests on site.
  • Cafe operators — Coffee and light food service with customers on the premises.
  • Caterers — Preparation and service of food off-site, at venues and private homes.
  • Food truck operators — Mobile food service, trading across council areas and at events.
  • Bakers — Production and retail of baked goods, with allergen and labelling obligations.
  • Butchers — Preparation and retail sale of meat, licensed for food handling.
  • Bar and pub operators — Licensed venues serving alcohol, with responsible service obligations.
  • Manufacturers — Making and finishing goods for sale, where the product carries liability past the gate.
  • Retailers — Shopfront sale of goods, with stock, customers and a lease to manage.
  • Online retailers — Sale of goods online, carrying product and data exposures without a shopfront.
  • Market stallholders — Trading from temporary stalls at markets and events, usually under organiser conditions.
  • Wholesalers and distributors — Supply of goods to other businesses, carrying products liability down the chain.
  • Warehouse operators — Storage and handling of goods belonging to customers.
  • Gym operators — Operation of fitness facilities, including unstaffed access hours.
  • Event planners — Organisation and running of events in venues that belong to somebody else.
  • Viticulturists — Vineyard operation and management, with crop, plant and visitor exposures.
  • Farmers — Primary production of crops and livestock, with plant, property and liability exposures.

Sources