Business interruption insurance UK: getting the sums right

What business interruption cover actually does

Property insurance rebuilds the premises and replaces the kit. Business interruption insurance deals with everything the balance sheet loses while that happens: the income that stops arriving, the overheads and salaries that carry on regardless, and the extra money spent keeping customers served from temporary premises. It is usually written as a section of a commercial combined policy and is normally triggered by insured damage — a fire, a flood, an escape of water — under the property section.

It is also, in our experience, the section of a commercial programme most likely to be set up on numbers that would not survive a serious claim. The cover itself is well established. The failures happen in the definitions and the arithmetic.

Gross profit: the definition trap

Most BI policies insure “gross profit”, and here the trouble starts, because insurers and accountants mean different things by the same phrase. An accountant’s gross profit typically deducts all direct costs of sale, including wages. An insurer’s gross profit is turnover less uninsured working expenses — broadly, only those costs that genuinely fall away when trading stops, such as purchases of raw materials or stock.

Wages rarely fall away in a real interruption. You keep paying skilled staff because you will need them when you reopen. If the sum insured was lifted straight from the accounts, those wages are outside the figure — and the business is underinsured from day one, often significantly. It is one of the most common errors we see on incoming policies, and it is entirely avoidable: the calculation just needs to be done on the policy’s definition, not the accountant’s.

Some businesses — particularly those with low direct costs, such as service firms — are better insured on a gross revenue basis instead. Which basis fits is a conversation about how your costs actually behave when trading stops, which is exactly the sort of conversation a broker should be having with you before renewal.

Indemnity periods: why 12 months is usually too short

The indemnity period is the maximum time the policy will pay losses from the date of the damage. Twelve months remains a common default, and for most businesses it is not enough.

Walk through a serious fire honestly. Insurers investigate and agree the claim. Debris is cleared, surveys are done, planning consent may be needed, and only then does the rebuild start — and rebuild lead times for materials and contractors are rarely quick. Specialist machinery may take months to source and commission. Then the part people forget: the business does not return to its previous trading level on the day the doors reopen. Contracts lost during the closure have to be re-tendered. Customers who moved to competitors have to be won back. The indemnity period has to cover that whole curve, back to the position the business would have been in — not just the reopening.

That is why 24-month and 36-month indemnity periods are the sensible starting point for most established businesses, particularly manufacturers, businesses in listed or unusual premises, and anyone whose customers sign long contracts. Remember too that the sum insured must reflect the whole indemnity period: a 24-month period needs the gross profit projected across 24 months, not one year’s figure.

Increased cost of working

Alongside lost gross profit, BI cover pays increased cost of working: the additional expenditure reasonably incurred to reduce the interruption — temporary premises, hired equipment, overtime, outsourcing production to keep contracts alive. Standard cover applies an economic limit: broadly, the extra spend must save at least as much loss as it costs. Additional increased cost of working (AICW) cover removes that test up to a separate limit, and for businesses where staying visible to customers is worth more than the arithmetic shows — losing a key contract can cost far more than one year’s figures suggest — it is often worth having.

Extensions worth understanding

The standard trigger is damage at your own premises. A run of extensions widens that, and they matter more than their small print suggests:

Denial of access covers loss when damage nearby — not at your premises — stops customers or staff reaching you. Suppliers’ and customers’ extensions cover interruption caused by damage at named or unnamed suppliers or key customers; if one supplier or one customer dominates your trading, this is not optional detail, it is core cover. Utilities extensions respond to failure of public electricity, gas, water or telecoms supply, usually subject to a minimum duration. Each extension carries its own inner limit and its own wording, and the inner limits are frequently modest by default. Part of structuring BI properly is deciding which extensions carry real exposure for your business and sizing them accordingly.

Underinsurance and declaration-linked cover

BI sums insured are exposed to average: if the sum insured is below the true figure, the claim payment can be reduced in proportion. Given the gross profit definition trap and the need to project across the full indemnity period, it is easy to be underinsured without knowing it.

Declaration-linked cover is the practical answer for many businesses. You declare an estimate of gross profit, the policy typically allows an uplift margin above the declaration, and provided the declaration was honest and kept up to date, the underinsurance penalty largely falls away. It is not a licence to guess — the declared figure still has to be calculated on the insurer’s definition — but it converts a trap into a manageable annual exercise.

The damage trigger, and the lessons of non-damage BI

It bears repeating that standard BI is triggered by physical damage. The COVID-19 pandemic tested the exceptions. Most policies did not cover pandemic closure losses, and the FCA brought a test case — decided by the Supreme Court in January 2021 — to resolve how certain non-damage extensions, mainly infectious disease and prevention-of-access wordings, should respond. Some wordings paid; many did not. The durable lesson is not about pandemics. It is that extensions do exactly what their words say, no more, and that knowing what your policy would and would not respond to is something to establish while the sun is shining. That, again, is wording work — the part of the job a broker does before anyone talks about premium.

How Apex approaches BI

Our starting point is never the premium; it is the recovery story. What would actually happen to this business after a major loss — how long to rebuild, what would keep costing money, which customers would drift, which suppliers are irreplaceable. From that we work back to the basis of cover, the definition, the indemnity period, the extensions and the sums. Described properly, the risk usually insures well. Described casually, BI is the section most likely to disappoint at the worst possible moment.

Frequently asked questions

Is business interruption insurance a separate policy?

Usually it is a section of a commercial combined or package policy rather than a standalone contract, and it is normally triggered by insured damage under the property section. It still deserves separate attention, because the sums insured, definitions and indemnity period are set independently of the property cover.

What indemnity period should we choose?

Long enough for the business to return to the trading position it would have been in without the loss — not just to reopen the doors. For most businesses that means thinking through reinstatement, re-fitting, re-tendering for lost contracts and winning customers back. Twenty-four months is a common starting point; businesses with long rebuild times, specialist premises or slow customer win-back often need thirty-six.

What is declaration-linked BI cover?

Instead of a fixed sum insured, you declare an estimated gross profit and the policy typically allows a margin of uplift above it. Provided your declaration was made honestly and updated at renewal, it substantially reduces the risk of an underinsurance penalty. It does not remove the need to calculate the declared figure on the insurer’s definition.

Does BI cover losses where there is no physical damage?

Standard BI needs an insured damage trigger. Some policies include limited non-damage extensions, such as denial of access or infectious disease cover, and the wording of those extensions determines exactly what they respond to. The FCA’s COVID-19 test case showed how much the precise words matter, which is why they should be read before you rely on them, not after.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.