Running a business will inevitably come with its ups and downs. There are plenty of challenges you’re likely to face, both within and outside your control, some of which may force your business to close temporarily.
For many small businesses, even a few weeks without any income could prove fatal. A survey by CGU found that one in four small businesses wouldn’t survive an enforced three-month closure. That’s where business interruption insurance comes in handy and offers peace of mind to businesses of all sizes.
What is business interruption insurance?
Business interruption insurance is a type of business insurance that offers cover for running costs during a temporary closure or pause to your regular trading. It’s typically offered as an add-on to general business insurance.
By providing financial assistance during a crisis, business interruption insurance helps businesses stay afloat and recover more quickly. If your reason for interruption is covered, having this policy in place could prevent irreversible damage to your small business and its finances.
What does business interruption insurance cover?
Although inclusions may vary depending on which insurer you take out cover through, business interruption insurance typically includes the following:
- Lost revenue: your policy can provide a benefit equivalent to what you would’ve been projected to have earned throughout your period of closure.
- Ongoing business expenses: things like commercial loan or lease payments, invoices, claim preparation costs, rent, utilities and other bills can be covered.
- Employee wages: if you want to keep your employees on the payroll, you’ll need to keep paying them. Your business interruption policy allows you to do just that.
- Relocation and other temporary costs: you can also be covered for costs related to keeping your business running, such as rent for a new premises and relocating your equipment.
Here are a few examples of covered events that could lead to your business shutting up shop temporarily:
- Your supply chain is disrupted or broken permanently due to an interruption to or closure of a supplier. A business interruption insurance policy can cover the cost of running your business until the link in the chain is repaired or you’re able to find a new supplier or suppliers.
- Your business is affected by a fire originating from your premises, a neighbouring property or a bushfire. Severe fire damage can be incredibly difficult to recover from, so your policy can keep your bills paid while you reopen elsewhere and/or get everything back up and running. If the fire is deemed to have been started intentionally or due to negligence on your part, you won’t be covered.
- Like fires, other natural disasters such as storms or earthquakes can spell major trouble for any business. Business interruption insurance can keep you on your feet as your rebuild efforts are in full swing.
- Your business’ major equipment breaks down. If you rely on specialised equipment to operate and one or more piece fails, weeks or months could pass while you wait for a repair or replacement. Having the right policy in place allows you to keep the lights on while you wait.
What does business interruption insurance not cover?
Once again, exclusions will depend on your insurer, but some common ones are:
- Any losses that occur outside the period your policy covers (known as the indemnity period)
- Any business income that isn’t adequately documented prior to a claim
- Closures resulting from acts of terrorism
- Closures resulting from pandemics
- Closures resulting from changes in government legislation
- Closures resulting from employee striking
How much does business interruption insurance cost?
There’s plenty that goes into determining the cost of a business insurance policy, and interruption cover is no different. The wide range of variables that can impact the cost of your insurance policy include:
- The nature of your business and its industry
- The size of your business
- Your business’ turnover
- Your business’ record of past claims and closures
- Where your business is located
- Your business’ general risk profile, including natural disasters and burglary
The other important thing to consider is that business interruption insurance is usually bundled as part of a general business cover package. According to BizCover, such packages cost businesses an average of $89 per month, but $103 for the average retail business and $145 for the average food business.
In this situation, you’re likely to pay less for your individual policy, but more overall, based on the other policies you’re buying. As a business owner, you’ll need to weigh up which option is more suitable for you and whether bundling your policies together is the most cost-effective option.
Who is business interruption insurance suitable for?
Business interruption insurance can offer protection for businesses across a wide range of industries. However, some who may benefit from interruption insurance the most include:
Retail businesses
Small, medium and large retailers are susceptible to delays or closures in the event supply chains fall through, as well as other external factors, that prevent daily foot traffic.
Hospitality businesses
Like retailers, hospitality businesses like cafes, restaurants and bars are heavily reliant on customers physically coming to their locations to spend money. Being unable to operate as normal can wipe out any avenues for generating income.
Wholesale and manufacturing businesses
Not only can warehouses that produce and/or process wholesale purchases be beholden to supply chain interruptions, but also heavily specialised equipment that is often required. If their equipment or workspace is impacted, work can grind to a halt.
Businesses that own their commercial property
If you’re running a business that owns your property and is paying off your commercial mortgage, having revenue sources cut off even for a few weeks or months could spell major trouble. Defaulting on a loan will likely have major ramifications for your business.
Case study: keeping a business afloat after water damage
Jemima owns a restaurant on a riverbank in central New South Wales. After torrential rainfall, the area floods, causing hundreds of thousands of dollars of damage to the property and its equipment. It also means she’s facing a period of three months where her restaurant will be closed.
Fortunately, Jemima has a business interruption insurance policy as part of her business cover package. She makes a claim and is able to cover her staff’s wages, the cost of rent and provide a temporary income source based on the restaurant’s average earnings in recent months and years.
Why compare business insurance policies through Savvy?
What’s the difference between business interruption insurance and income protection insurance?
Income protection insurance is a type of life insurance designed for individuals, including employees and business owners, who are unable to work due to an illness or injury.
It covers up to 90% of the value of your wages while you’re on the mend, which is the key difference between it and business interruption insurance: income protection only offers cover for your personal pay, while business interruption covers revenue and other commercial expenses.
Depending on your circumstances, one may be more suitable than the other, or you might choose to have both in place. If you pay yourself a salary, business interruption insurance should offer the cover you need to continue paying yourself.
