Business Interruption
Insurance.

Business interruption insurance is designed to replace the income your business loses when a fire, flood, storm or other physical event stops you from trading normally. It is not property insurance. Property insurance covers the cost of reinstating the building, equipment and contents. Business interruption insurance covers the revenue your business loses and the additional costs you incur while you are unable to trade, during the period needed to reinstate the damaged property.

Business interruption insurance is typically triggered when a fire, flood, storm or other physical event damages your property and prevents your business from operating normally. For a claim to be triggered, the property damage itself generally needs to be covered under the same or a related property policy. If the physical event causing the damage is excluded from the property policy, the business interruption claim will typically not be covered either.

Business interruption insurance does not typically cover loss of revenue from general economic downturns, loss of a key customer or supplier, pandemics or government-mandated closures unrelated to property damage or events where no physical damage has occurred. Supply chain disruption or loss of access to premises not caused by physical damage to property is also generally not covered under standard policies. Cyber events that interrupt business operations may require a separate cyber liability policy. Each policy has its own exclusions and these should be reviewed carefully.

An indemnity period is the maximum length of time for which a business interruption claim can be paid. It runs from the date of the covered event that triggered the interruption. Common indemnity periods are 12 months, 24 months and 36 months. The indemnity period should reflect how long it would actually take a business to return to the same level of revenue it was generating before the event. If the indemnity period is too short and the business is still recovering when it expires, the policy stops paying.

Business interruption policies are typically calculated on the basis of the annual gross profit or annual revenue of the business, adjusted for variable costs that would not continue if the business stopped trading. The sum insured should represent the revenue or gross profit that would be lost over the full indemnity period selected, not just one year. Underinsurance is a significant risk in business interruption cover. If the sum insured is lower than the actual loss, the insurer may apply average and reduce the claim payment proportionally.

Underinsurance occurs when the sum insured under a business interruption policy is lower than the actual financial loss incurred during an interruption. Many business interruption policies include an average clause, which allows the insurer to reduce a claim payment by the same proportion that the sum insured falls short of the true exposure. For example, if the sum insured covers 70 per cent of the actual exposure, the insurer may only pay 70 per cent of the claim. It is worth reviewing your sum insured at each renewal as your revenue grows.

Business interruption policies issued since 2020 typically include specific exclusions for pandemics, communicable diseases and government-mandated closures. Whether pre-pandemic policies responded to COVID-19 related interruptions was the subject of significant litigation in Australia and other jurisdictions. For policies issued or renewed in recent years, pandemic and communicable disease exclusions are generally standard. Get in touch and we can identify whether any pandemic exclusion applies to your specific policy.

Business interruption insurance is not a mandatory requirement under Australian law for most businesses. However, some commercial lease agreements may require you to hold certain forms of cover as a condition of the lease. Lenders financing commercial property may also require it as a condition of a loan. Whether you need business interruption cover depends on your specific financial exposure and the consequences of being unable to trade for an extended period.

Business interruption premiums vary depending on the revenue or gross profit being insured, the length of the indemnity period, the industry and the claims history of the business. A small business with modest annual revenue and a 12-month indemnity period attracts a different premium to a larger business with high fixed costs and a 36-month indemnity period. Every business is different. The only way to get an accurate figure is to talk through your specific situation with us.

A business interruption claim can range from a few months of modest revenue loss to years of lost trading revenue for a large operation that cannot resume. A retail business that is closed for six months following a fire may lose hundreds of thousands of dollars in gross profit. A manufacturer or processor with specialist equipment and a long rebuild period could face a multi-year interruption running into millions of dollars. An uninsured loss of that scale may be impossible for a small or medium-sized business to absorb.

Business interruption insurance is a specific cover for lost revenue and increased costs following a property event. Business pack insurance is a packaged policy that typically includes a business interruption section alongside property, liability and other covers. A standalone business interruption policy addresses the revenue risk in isolation. A business pack bundles the property and business interruption covers together, which can simplify the claims process since both sections sit under the same policy when a fire or flood damages property and interrupts trading at the same time.

Insurers typically ask for the annual revenue or gross profit of the business, the fixed and variable cost structure, the nature and location of the business premises, the indemnity period required, the existing property cover arrangements and any prior claims. When you get in touch, we will help you structure this information correctly and work through the right sum insured and indemnity period for your situation.

Notify us as soon as the interrupting event occurs. Document the event, the damage and its impact on your operations. Begin gathering revenue data from before the event to establish the baseline that the claim will be measured against. Where possible, keep records of additional costs incurred to maintain some level of operations during the interruption, as these may be claimable as increased costs of working. We will be involved throughout the claims process.

A decline from a standard insurer does not mean cover is unavailable. We have access to a wider range of insurers beyond the standard market. Get in touch and we can look at options that may not have been available to you through the standard market.