
We work with a wide range of businesses – from agriculture and manufacturing to food processing and real estate – each with unique needs based on their industry, capital structure, and business model. Yet, business interruption insurance is often treated as a one-size-fits-all solution, leaving critical gaps in coverage.
Too often, we see policies where the insured amount seems arbitrary, and the indemnity period doesn’t align with the client’s actual risks or recovery timeline.
In this “Spotlight” we share insights on business interruption coverage and the potential consequences of misunderstandings or incorrect policy declarations. This serves to act as a concise overview of a complex topic.
Firstly, it is helpful to understand that BI coverage is often referred to as “Time Element” coverage, reflecting the time needed to restore a business back to its pre-loss operational state. Time Element coverage can include Business Interruption, Rental Income, Extra Expense, and Denial of Access, among other components.
After a covered physical damage loss happens, the clock will tick on the following parts of the loss, which hopefully demonstrates the “time element” reference:-
Time it takes to adjust the initial loss
Time to draft architectural plans or do engineering studies
Time to bid the job and whole permitting process
Time to rebuild the premises
Time delay due Seasonal weather related issues (i.e. extreme heat or cold)
Time delay due to labour and / or construction materials
Time to replace specialist manufacturing equipment. (Order, manufacturer, ship and installation).
Risk Mitigation / Management:
Underwriters often ask if the Insured has a business interruption (BI) mitigation plan in place. For example, is there another manufacturing facility, either internal or through an external provider, that can step in to maintain production if physical damage occurs? Can operations be relocated quickly?
This can help minimise potential BI claims as there is an action plan that has been compiled.
BI claims are often the largest part of a loss and can take significant time to settle, potentially turning a minor property claim into a major overall loss. A well thought-out mitigation plan gives underwriters greater confidence and makes them more comfortable offering this coverage.
How does Business Interruption cover respond?
In the majority of cases Business Interruption cover is only provided following a covered physical damage loss to the covered interest of the policy.
Example:- if a windstorm occurs and the business is closed but causes no physical damage to a building or its equipment, a business interruption claim cannot normally be made unless access to the building is restricted by an official enforcement order.
How is the business interruption amount calculated?
Gross Profits – usually selected for retail / manufacturing business
Gross Revenue – usually selected for service / consulting business
Extensions: -
· Additional Increased cost of working
· Ingress / Egress
· Service interruption
· Denial of access
· Notifiable decease
· Customers and suppliers
Payroll is often removed from BI calculations, depending on the business. However, it is important to consider when doing this, whether employees can be rehired quickly, or are they highly trained/dependency on them and therefore they need to remain on the payroll during a business interruption loss.
The importance of the BI Worksheet:
Clients are often hesitant to complete a BI Worksheet due to the confidentiality of financial information. However, it is a critical tool for both the insured and underwriters. It establishes how the BI coverage is calculated and helps adjusters apply the same logic during a claim. Accurate completion ensures the business is adequately covered for its interruption exposure.
BI Worksheet Updates:
BI Worksheets are typically based on past financial data and future projections but are rarely updated mid-term. We recommend reviewing them every 6 months to ensure accuracy.
Most policies include an average clause or coinsurance penalty, thus making precise calculations are essential to avoid penalties and ensure sufficient coverage.
In your next stewardship meeting with the client, why not add a discussion about reviewing the BI Worksheet to the agenda?
What length of coverage can you choose?
Business Interruption (BI) coverage is typically available for 12, 24 or 36 months, depending on your business needs. The required period should match your specific reinstatement timeline and operational requirements.
For example, a service-based business like an office-based insurance broker, could quickly resume operations by moving to a temporary office, or having staff work from home, incurring only extra expenses with minimal income loss. Whereas a specialist manufacturer, may have a very long lead in time to restore the business.
Why opt for longer periods?
BI coverage is designed to keep your business operational while premises and equipment are restored. The time required, depends on your business type and the complexity of replacing equipment, which may warrant a longer indemnity period.
Example:- Imagine you’re a printing company in the USA, using specialist German printing machines. If one is damaged, it will take time to order, manufacture, ship, and install a replacement. Since these machines are not readily available, there could be additional delays. Therefore, it is important to account for the realistic timeframe needed to restore your equipment.
Does increasing the BI indemnity period cost more? How is the premium calculated?
The short answer is yes. Will it be pro rata? Not necessarily. A reduced amount can be negotiated if a robust mitigation plan is in place.
What is the motivation for the Insured to restore the business, if they have a long Indemnity period?
An Insured generally doesn’t want to be out of action for more time than necessary, as this opens the door for competitors to quote for their business.
Programme Limits – have you bought enough cover?
If an Insured has either a standard market policy or a shared and layered programme, will the overall limit purchased provide enough cover for a physical damage loss, plus business interruption with say a 24-month indemnity period? Has the worst-case scenario been considered compared to the total policy limit purchased, to ensure the limit is adequate?
Extra Expense:
This is a whole topic which is often not thought about, by both underwriters and clients.
If a client has a loss and is unable to mitigate the loss through surplus capacity elsewhere in their business, they will want to set up a temporary facility somewhere, to keep their business going. This is the whole purpose of extra expense as a sum to help them do this.
This Extra Expense limit is important for both underwriters and clients. On one hand its instantly increasing a potential loss amount however, hopefully its real function is to reduce the ultimate business interruption exposure amount by helping the Insured to overcome the loss; by setting them back up in business so the operation of the business can resume whilst the premises are being rebuilt/repaired.
Business Interruption Claims:
When a claim happens and a business interruption claim occurs, some clients wait for the loss adjuster to prepare all the paperwork.
However, no one knows the business better than the Insured and we would recommend for the Insured to be pro-active and prepare their own claims proforma, which dovetails well with the business interruption worksheet to show what has been lost, in terms of the operations of the business.
Examples of potential issues:
1) Printer of plastic bags
Situation: Following a physical damage loss to a piece of equipment, the BI Loss is still outstanding 3 years later.
Reason: No business interruption sheet compiled for the policy year
Dispute: Insurers disagreed on the business interruption figure being claimed, which doesn’t have any official paperwork to back it up.
Resolution: Ensure a BI worksheet is completed at every renewal as a best practice.
2) Food Manufacturer
Situation: BI indemnity period purchased 12 months
Cause: Food equipment manufactured in Germany
Dispute: Client thought the equipment would be quick to replace, however in reality there is a 6-month order time, 6 months manufacture time, 2 months shipping time and 2 months installation and testing time.
Resolution: Equipment analysis on how long from start to finish to order new equipment should be completed, in this case 24 months indemnity period should have been purchased.
3) Apartment owner
Situation: BI indemnity period 12 months
Cause: Fire loss wiping out two apartment blocks, garden style
Dispute: The bank had requested 18 months BI, their methodology was 6 months to settle the loss, 6 months to put the buildings back and then 3 to 4 months to rent out with some added contingency. Insured had only requested 12 months to try and keep the cost down.
Resolution: Consider what the lender requirements are on habitational property, and endeavour to conform to their requirements.
4) Fashion Retailer
Situation: No BI purchased as Stock insured at selling price under a separate stock throughput policy. This is a common practise to try and reduce the price.
Cause: Fire at sole distribution centre, which repackaged and processed the goods from the Far East.
Dispute: The main location was down for 6 months, since there was only a small loss to the stock in the distribution centre the stock throughput paid out for goods that were lost. However, the 6-month downtime of the DC wasn’t covered as the property policy didn’t include business interruption, as the broker thought the stock throughput policy would take care of this, due to the basis of valuation being at selling price.
Resolution: When you split out business interruption, using stock throughput policies, go through a disaster scenario to make sure each policy will respond to the needs of the client in different scenarios. Be careful you don’t lose any coverage and remember stock (sometimes seasonal) has a process, delivery, repackaged or worked on and then shipped.
5) Manufacturer
Situation: Service Interruption Loss
Cause: Tornado hit the electricity supply, which in turn took out the water pumping station.
Dispute: The client had electricity through their own back-up generators, however, they didn’t have any water, and were reliant on this for their process, due to the water pumping station being 2 miles away. They were unaware that service interruption was limited to 1,000 feet from the property under our policy. They had to send a whole shift crew home and then wait several days until the water came back online for operations to resume.
Resolution: Review the client’s requirements and where the critical points of Water, Gas and Electricity are distributed from. This was a very unusual loss, however, on renewal the client is going to review whether the boiler and machinery policy will extend to include the water pumping station as well, as they are so reliant on water.
Checklist - Areas of risk / concern for agents to consider: -
1) Selecting the right cover applicable to the client’s business
· Gross Profit
· Gross Revenue
2) Setting the right Sum Insured
· Up to date BI worksheet
· Keeping the BI worksheet up to date
· Payroll depending on whether the business is reliant on key workers or seasonal workers
3) Selecting the max indemnity Period
· 12, 24, 36 Months
· Some situations will require more than 12 months
4) Selecting the right extensions
· Think about possible scenarios that could affect the client’s business versus the coverage being offered.
5) Shared and Layered programmes
· Is the programme limit big enough for a combined PD and BI loss, especially if the BI loss is still being paid after 24 or 36 months.
6) Has the client provided an up to date Business Interruption worksheet
· When was the sheet last updated is it 12 months, 24 or 36 months old?
· Important to get a new one each renewal.
· Important to have a 6 month review of the BI worksheet
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