Is Your Business Truly Covered? Why Your Business Interruption Insurance Might Fall Short

We see it all too often: a business is hit by fire, flood, or storm damage. Thankfully, they had the foresight to take out Business Interruption (BI) insurance—great! But when the payout arrives, it doesn’t come close to covering the real financial impact…not so great. 

On paper, the sums insured look reasonable. But when disaster strikes, hidden gaps quickly emerge, leaving businesses scrambling to stay afloat. 

So why does this happen so often? The truth is that getting the right level of BI cover is more complex than many business owners realise. It requires a deep understanding of your business operations and a careful reading of your insurance policy wording. 

In this article, we’ll unpack some of the most common pitfalls we encounter and explain why your existing BI insurance might not provide the safety net you expect. 

Gross Profit

One of the most common areas where underinsurance creeps in lies in the definition of “Gross Profit.” Your accountant’s definition and your insurance policy’s definition are likely very different, and that discrepancy can lead to serious shortfalls in your coverage. 

A frequent mistake is automatically deducting all wages when calculating insured gross profit, even for key staff who would remain during a shutdown. Most policies expect the costs of essential personnel, such as management, to be included. So, misclassifying these fixed costs as variable costs can shrink your claim payout. 

To avoid this trap, it’s essential to understand your policy’s definition of ‘Gross Profit’ and treat wages with care. Missteps here can financially weaken your business long before any interruption occurs. Some wages are variable, some aren’t, and getting it wrong means your business could be underinsured from day one. 

Ongoing Working Expenses

Another area of concern is the treatment of ongoing working expenses. Many business owners, and sometimes even policies, incorrectly assume that all costs stop when trading stops. In reality, this is rarely the case. 

Energy agreements often include fixed charges, regardless of usage. Vehicle leases continue even if your fleet is off the road. Maintenance contracts for critical equipment still require payment. If these unavoidable costs are treated as variable and deducted from your claim calculation, you’ll be left to foot the bill. 

The simple rule of thumb is that if a cost continues while your business is not fully operational, it likely shouldn’t be deducted when calculating your BI sum insured. Failing to account for these ‘uninsured working expenses’ can create a serious gap in your coverage. 

Insufficient Indemnity Periods

Many BI policies still default to a standard 12-month indemnity period. However, in our experience, this often isn’t enough time to fully recover from a significant loss. 

Think about what recovery really involves: planning repairs, getting approvals, rebuilding, refitting, reopening, rehiring staff, and regaining lost customers. Each of these stages takes time, and in many cases, the process can easily stretch to 18 or 24 months, sometimes longer. 

By underestimating the time it takes to recover and relying on a standard 12-month indemnity period, businesses risk running out of cover before they’re back on their feet financially. 

External Delays 

External factors can further complicate and lengthen the recovery process. Delays in planning approvals, material shortages, limited availability of skilled contractors, and rising rebuilding costs all contribute to this. 

What might have once been considered a “straightforward” loss now carries a higher risk of extending beyond typical indemnity periods. The rebuild might not even start for several months after the initial loss, and that’s before factoring in the time needed to resume trading and rebuild your customer base. 

Ignoring these potential days when establishing your indemnity period is a gamble that few businesses can afford to take. 

Bridging the Gap

Getting your Business Interruption (BI)  cover right requires a proactive and realistic approach. It means looking beyond your profit and loss statement and understanding how your business would actually operate in the face of disruption. 

Here are three crucial steps to take when reviewing your BI insurance

1. Understand the policy definition of gross profit. Don’t rely on your accountant’s definition. Scrutinise your policy wording and ensure you understand precisely which costs should, and should not, be deducted. 

2. Identify and account for uninsured working expenses. Think about the costs that will continue even if your business is temporarily unable to trade. These should not be mistakenly treated as variables and excluded from your cover. 

3. Set a realistic indemnity period. Don’t default to 12 months. Consider all the stages of recovery, factoring in potential delays. In many cases, 18-24 months is a more accurate reflection of what’s needed.

The time to address these issues is now, before a loss occurs. Once a claim is in motion, it’s too late to rectify any shortcomings in your coverage. At L Wood Insurance Brokers, we urge you to review your Business Interruption insurance with these points in mind. A thoughtful review today could be the key to a full and timely recovery tomorrow. 

For further guidance, please don’t hesitate to get in touch with our friendly team on 01274 515747.