What’s business interruption insurance all about?

If your business is ticking along nicely, you probably don’t spend too much time thinking about what would happen if you suddenly had to close for a period of time.

Business interruption insurance plays a pivotal role in safeguarding your business against financial losses when unexpected events cause a halt or significant disruption in your operations.

If you’re wondering what business interruption insurance is and what it can cover, read on.

Business interruption insurance 101

Often nestled within a broader business insurance policy, business interruption insurance is designed to act as a financial safeguard when your company faces unexpected disruptions that impact your ability to operate. These policies often focus on covering any loss of income your business may suffer after a disaster.

The primary purpose of business interruption insurance is to ensure that your business has access to the necessary funds to maintain financial health during periods it cannot generate revenue. This can include not just profits that would have been earned during the closure but also operating expenses that continue despite the halt in activities, like rent, utilities, and employee salaries. It allows your business to navigate through tough times without depleting reserves or facing bankruptcy.

Why is business interruption insurance so important? 

The importance of business interruption insurance cannot be overstated. It plays a critical role in your company’s survival and continuity strategy. It can protect you in the event of…

• Natural disasters: Events like earthquakes, hurricanes, and floods can cause significant physical damage to your business premises, often rendering them unusable. For instance, the Australian bushfires of 2019-2020 had devastating effects on businesses, with the Insurance Council of Australia reporting over AUD 2 billion in claims, many of which included business interruption losses.
• Fires: A common cause of business disruptions, fires can lead to both structural damage and prolonged closures for repair.
• Supply chain disruptions: Businesses that depend on materials or products from affected areas face prolonged interruptions.
• Mandatory evacuations: In the event of a chemical spill, gas leak, or other hazardous situation, your business may be forced to evacuate, leading to unexpected closures.
• Cyber attacks: With the rise of digital businesses, cyber-attacks have become a big threat and can potentially shut down operations. The 2017 WannaCry ransomware attack, for example, affected over 200,000 computers across 150 countries, demonstrating the extensive reach and impact on businesses.
• Utilities and services outage: Unexpected outages of essential services like electricity, water, or internet can halt your business operations. While these might be short-term, the financial impact can still be significant, especially if your business heavily relies on these services.

What does business interruption insurance cover?

Typically, business interruption insurance covers:

• Lost income: Covers projected revenue loss based on past financial records during the interruption period.
• Operating expenses: Pays for ongoing expenses like rent, utilities, and payroll, ensuring operational continuity.
• Relocation costs: Supports expenses related to moving and operating from a temporary location due to damage at the primary premises.
• Training costs: Funds staff training on new equipment or technologies necessary for resuming operations after a disruption.
• Extra expenses: Covers additional costs required to keep the business operational during recovery, such as leasing temporary equipment. 
• Civil authority ingress/egress: Compensates for income loss when government actions block access to your business, affecting operations.
• Service interruption: Covers losses from the disruption of essential services like power and water, caused by a covered peril.
• Supplier and customer impact: Provides coverage for losses due to supply chain disruptions or key customers’ operations being impacted.

What isn’t included in business interruption insurance policies?

Business interruption insurance is a vital safeguard for companies, but it has limitations, including the requirement for direct physical damage for a claim, exclusions on losses due to pandemics and infectious diseases, and not covering undocumented income.

Other common exclusions include losses from utility interruptions unless caused by a covered peril, financial impacts of government actions, damages from war and nuclear events, failures to meet contractual obligations, and supply chain disruptions unless specifically stated in the policy.

Who needs business interruption insurance?

Business interruption insurance is an integral part of risk management. It serves a broad spectrum of businesses across a range of industries. Essentially, if your business operates in a physical space or relies on a steady flow of income to cover operational costs, you will benefit from this coverage.

Some of the most essential businesses include:

• Courier businesses: Highly dependent on timely deliveries, they face risks from traffic disruptions, vehicle damage, and fluctuations in fuel prices. That’s why business interruption insurance is often included in most courier insurance policies.
• Logistics companies: Critical in maintaining supply chains, they’re vulnerable to warehouse damage, cyber attacks, international trade interruptions, and complex network disruptions.
• Retail businesses: Brick-and-mortar shops face risks from theft, natural disasters, and other disruptions that can halt sales and foot traffic.
• Manufacturing companies: With complex machinery and supply chains, manufacturers can experience significant downtime from equipment failure or material shortages, impacting production schedules and revenue.
• Technology and IT companies: While some may operate digitally, data centres and offices can be affected by power outages, cyber-attacks, or hardware failures, disrupting services and operations.
• Service-based enterprises: Businesses providing services, like salons, fitness centres, and consulting firms, rely on daily customer interactions. Interruptions can significantly affect their income and ability to pay rent and salaries.

Doesn’t my property insurance cover me? 

While your property insurance will cover the cost of damages caused by insurable events such as fire or storms, it won’t cover you for any lost income while your business is unable to operate.

Although you need to have cover to help with any rebuilding or repairs via property insurance, you also need to have the peace of mind that you can financially cope until you can reopen by having business interruption insurance in place.

Shield your business against the unpredictable

Business interruption insurance isn’t just a safety net; it’s a strategic asset for ensuring your operations can weather any storm. From natural disasters to cyber threats, the right coverage means you’re prepared for whatever comes your way, safeguarding not only your financial stability but also your peace of mind.

Don’t let unforeseen disruptions derail your success. Connect with our Perth insurance brokers and tailor a business interruption policy to your unique needs.