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What is business interruption insurance?
Business interruption insurance replaces lost income caused by a disaster or major event like a fire, flood or outbreak near your premises. It can keep your business afloat if disaster strikes and you're forced to temporarily close, scale back operations or operate at a higher cost.
For example, if a bushfire destroys your shop and most of your stock, it can provide protection for the loss of income, increased cost of operating your business, and pay for ongoing expenses, such as wages and rent. If you want cover, you'll need to add business interruption insurance to your business insurance policy. It's usually available as an additional add on.
What does business interruption insurance cover?
Covered
Lost revenue
Ongoing operating expenses
Increased operating costs needed to maintain normal revenue
Increased operating costs not related to revenue
Professional fees to organise your insurance claim
Outstanding debts you can't recover due to damage to your debt records
Not Covered
Undocumented income
Voluntary closures
Losses due to strikes
Losses due to breakdown in equipment or machinery
The indemnity period has passed (e.g. the amount of time a policyholder has to claim the benefits of business interruption insurance)
Keep in mind: you'll only be covered if those things happen because of an insured event, which can include:
An outbreak of an infectious disease within a certain distance of your premises
A murder or suicide at your premises
A shark or crocodile attack within a certain distance of your premises
Closure by government authority, including street closures and curfews
Loss or damage to your property including fire, natural disasters like earthquakes, storms, floods, explosions and theft
Loss or damage to other property affecting your business
Does your business need it?
Here are some reasons you might need business interruption insurance:
You pay a lot in rent. Some bills like rent and loan repayments will keep coming even if your business isn't operating. You'll need a way to pay them if a disaster causes you to shut down.
You carry a lot of stock. If your stock gets damaged, it could take a while for you to replace it.
You have a physical shop. If you have a physical shop and have to close down, business interruption insurance will cover your lost revenue. Even if you have other ways to sell your product, such as through a website, a business interruption insurance policy will pay any increases in operating costs to keep your business running.
You have employees. Business interruption insurance will allow you to continue paying your employees so that they don't quit and go somewhere else.
You rely on specialised equipment. If your equipment is destroyed and it takes a long time to have it replaced, business interruption insurance will help keep you going while you wait on replacements.
Business interruption by the numbers
197,000 insurance claims were made in response to the floods in February and March 2022.
40% of small businesses fail to reopen after a natural disaster.
How to calculate business interruption insurance cover
To calculate how much business interruption insurance you should have, you'll need to work out how much revenue you expect to make over the next year, and then identify how long you would need to rebuild your business if the worst happened. Here's what to do:
Estimate how much revenue you'll make over the next 12 months.
You can start by looking at your profit and loss statement for the previous financial year, then work out how much that will increase or decrease based on market trends and business performance.
Identify how long it would take to rebuild.
Imagine the worst-case scenario for your business. How long would it take you to get back on your feet if you lost all your property including the building, stock and equipment? That's how many months of cover you would need. This is your indemnity period.
Give the insurer both of these figures, and they'll work out the rest when it comes time to claim. But basically, if you lose it all, they'll divide the figure from step one by the number of months in step two to arrive at your total lump sum payout (and they may even give you a little extra as a buffer). This is your limit of liability.
They'll add in extra cash for your increased expenses (such as money you'll need to spend on advertising when you're finally back in business) and may deduct money that you have saved as a result of being out of business (such as your electricity bill).
If you need help estimating next year's revenue, you can find business interruption worksheets online. Some brokers even offer online calculators that can help you.
Expert insight
"It’s really important you understand your policy so you can make a successful claim. When we owned a toy store, an overhead air conditioning unit that was part of the Mall's AC supply, collapsed through the roof into our store. There was lots of damage to the store and stock and we were closed for almost a month. The insurance company fought us all the way when we tried to claim. It was only that we really understood the policy and were able to articulate why our claim was legitimate by citing various clauses, that we got any money. As such, it might be worth using a broker who can provide a plain english policy and help you understand the limits of your insurance before you take out a policy."
Let's say you run a small bicycle shop and you anticipate revenues of $200,000 over the next 12 months. You also believe that if you were forced to close your doors, you could get fully back up and running after 6 months. So you take out a business interruption policy with a 6-month indemnity period based on revenues of $200,000. That means your limit of liability is $100,000
Your insurer has agreed to pay up to 120% of your limit of liability just in case your recent revenues were above your original estimate. So your max payout would be $120,000.
Well, the worst happens and a fire destroys your business, causing you to shut down for 7 months. In the 12 months prior to the fire, your revenues were $220,000.
Here's how it would play out:
Item
Amount
Description
Your initial payout based on a six-month limit of liability (even though you were closed for seven months, you are only eligible for six months' worth of benefits since that's the limit of liability you chose)
$110,000
Your liability limit was $100,000 based on your estimates, but your actual revenues were higher. Since your insurer offers up to 120% of your limit of liability, this is more than enough to cover your actual revenues for those six months. If your actual revenues were lower than your limit of liability, you would receive a lower amount.
10% trend growth
+$11,000
Some insurers will tack on a little extra to account for future growth.
Increased operating expenses to avoid further loss of revenue
+$5,000
You may need to spend extra to advertise your grand reopening to ensure you get the same foot traffic as you had before.
Savings as a result of being shut down for six months
-$6,000
You didn't have to pay rent, electricity or maintenance costs while being closed.
Excess
-$500
Your excess on this policy was $500
Total payout
$119,500
Talk to a broker about business interruption insurance
Frequently asked questions
Generally, business interruption insurance can pay a financial benefit to cover the loss of any sales you would have made, if your ability to earn an income wasn't interrupted. The payout lasts while your business is out of action, until your operations resume as normal.
Fire and explosions are the main causes of having to make a business interruption claim. This could start with a stove in a kitchen in a hospitality venue or an office, or it could be caused by faulty electrical equipment in other business premises – or even by combustible dust and materials catching fire in a factory.
This depends on your specific policy, but the waiting period usually lasts between 24 and 72 hours. Most business interruption coverage is designed to respond within 1 to 3 days after the interrupting event occurs.
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To make sure you get accurate and helpful information, this guide has been reviewed by Justine Mclean, a member of Finder's Editorial Review Board.
Gary Ross Hunter was an editor at Finder, specialising in insurance. He’s been writing about life, travel, home, car, pet and health insurance for over 6 years and regularly appears as an insurance expert in publications including The Sydney Morning Herald, The Guardian and news.com.au. Gary holds a Kaplan Tier 2 General Advice General Insurance certification which meets the requirements of ASIC Regulatory Guide 146 (RG146). See full bio
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As an authority on all things personal finance, Sarah Megginson is passionate about helping you save money and make money. She is an editor and money expert with 20 years’ experience and an extensive background in property and finance journalism. Sarah holds ASIC RG146-compliant Tier 1 Generic Knowledge certification, and she's a regular media commentator, appearing weekly on TV (Sunrise, Channel 7 news, Nine news), radio (KIIS FM, Triple M, 3AW, 2GB, 6PR) and in digital and print media. See full bio
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Liability insurance is a broad term that describes a few types of business insurance cover. The type you need will depend on the nature of your business.
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
Finder
RichardApril 15, 2015Finder
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
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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