We believe that every business should include Business Interruption (BI) cover as part of their commercial insurance programme.
If your premises or contents suffer significant damage, it will likely impede your ability to trade and, in severe circumstances, could halt your business operations entirely.
Business Interruption (BI) cover is designed to compensate for the drop in your income or profit that has resulted from damage to your insured property and/or assets, such as buildings, contents, machinery, stock, etc. It then aims to continue until your business income is no longer being impacted negatively by the incident; note that this period may extend long after your property/contents has been repaired and restored.
Types of Business Interruption Cover
Cover for Business Interruption can come in a variety of guises; which cover is best for your business will very much depend on your business type and the way the business’s income or profit is derived. Here are some of the different options of cover:
- Loss of Profit
- Loss of Income
- Loss of Gross Profit
- Loss of Rent
- Increased Cost of Working
- Additional Cost of Working
Getting your Business Interruption Insurance right
Arranging Business Interruption can be complex; as noted by Zurich in 2024, the Chartered Institute of Loss Adjusters reported that 43% of Business Interruption Insurance is 53% underinsured.
Here, we explore two common areas that lead to underinsurance when it comes to Business Interruption cover in order to help you avoid these potential pitfalls.
Setting the Sum Insured
Setting the correct and adequate sum insured for Business Interruption cover can often be problematic due to differences in the way accountants calculate ‘Gross Profit’ for accounting and tax purposes, which differs considerably from the insurance definition of ‘Gross Profit’. Policies will contain the insurance definition of ‘Gross Profit,’ which should be carefully observed when setting the limits on your insurance.
Another common error when setting an appropriate sum insured for Business Interruption cover is setting the amount on historical performance (i.e. the last set of audited accounts), which does not take into account future growth of the business, or inflation during the indemnity period provided in the policy. It is key to remember that you are trying to cover your future losses.
Selecting a suitable Indemnity Period
The next challenge in arranging Business Interruption cover presents itself while setting the right ‘Indemnity Period’. While getting the right sum insured is key, this is another of the most critical elements of a BI policy which can also often be misjudged.
Choosing the right indemnity period can be the difference between a smooth recovery and being out of pocket long before your business is fully back on its feet.
What is an Indemnity Period?
In the context of BI cover, indemnity period is the maximum length of time your insurer will cover loss of gross profit and additional increased costs of working following an insured event. It should be noted that, even if the sum insured on your policy is yet to be exhausted, claims payments will only be made for the indemnity period noted on your policy. Essentially, it’s the period during which your business has protection while it gets back to its normal trading position.
Many businesses default to a 12‑month period because it can help to keep insurance premiums down; in reality, this is often an incredibly risky underestimation.
Why the Correct Indemnity Period is so Important
Recovery nearly always takes longer than expected. Even with robust contingency planning, reinstating buildings, replacing equipment, sourcing materials, recovering lost customers and re-establishing your place in the market can take significant time.
If your indemnity period is exceeded while your business is still recovering, the financial support from your insurance policy stops while you may still be suffering losses. That can turn what should have been a temporary disruption into a long-term financial setback.
Watch our short video which explains what an indemnity period is and why it is a critical consideration within business interruption insurance.
What to Consider when Choosing your Indemnity Period
This type of cover traditionally came with a standard 12 month indemnity period but periods of up to 36 months or even longer can be purchased. The period you choose to insure will depend entirely on your business’s individual circumstances and how quickly it could recover from a catastrophic loss.
When selecting an indemnity period, you should consider the worst‑case timeline to reduce the chances of being left short in the event of a claim.
We outline some of the key factors to consider when selecting an appropriate indemnity period.
- Clearing debris and damaged property from your site – This is the initial step in recovery and can be unexpectedly time-consuming.
- Rebuilding or repair time – Naturally, this will depend on the type of damage suffered but it is important to consider UK planning permission processes, construction lead times and contractor availability, for example, which can be notoriously slow. A serious property damage event can easily take 18-24 months to resolve. There are many processes involved, such as hiring architects, project managers, and other professionals to assist with the rebuild, design and any planning applications. The planning application process for commercial property can be particularly long; local authorities can take months to grant permissions, even for replacing an existing building. Obtaining tenders from building contractors and agreeing on a construction start date is another process which can cause unexpected delays.
- Designing, ordering, delivering and commissioning machinery – The latter part of this can only be done after any building works are complete. The supply of bespoke and specialist manufacturing machinery, for example (especially when from outside the UK), can often exceed a basic 12-month indemnity period. Even items that are not custom-built can have long lead times due to global supply chain delays, something many UK businesses experienced post‑pandemic and post‑Brexit.
- Stock replacement – If needed, how quickly could you replace your stock? For some industries – manufacturing, retail, food production, to name a few – substantial stock loss may take months to rebuild, particularly during peak seasons.
- Reopening and resuming operations – Once your building is rebuilt or repaired, any machinery is operational, stock is replenished, and you have a prepared workforce, you can inform your customers that you are open for business again. Even after physically reopening, revenue doesn’t necessarily bounce back overnight. Your business may need time to regain customer confidence, rebuild relationships, or invest in marketing to help re-establish your position in the market.
Your Business Interruption losses are considered to have stopped when your sales and turnover return to the levels predicted, should the incident have not occurred.
Although 12 months used to be standard, many insurers and brokers now recommend 24 or 36 months for the majority of UK businesses, particularly those with complex operations or high supply‑chain dependencies. Naturally, though, we would always review your business, its risks and operations in order to help you determine a suitable indemnity period for your business interruption cover.
How We Can Help
Business Interruption insurance can feel complex but rest assured that our Commercial Team at McClarrons have experience across a vast range of industries and understand the variety of options for this type of cover, helping you make the right choices when it comes to setting your covers and limits.
Your sum insured and indemnity period should never be an optimistic best guess – Business Interruption cover can truly be your safety net when it comes to a claim. Underestimating these elements can leave your business exposed at the time you need protection most. Taking the time to review your operations, supply chain and potential recovery timelines will help you ensure your BI insurance truly supports your long‑term resilience.
Working with a specialist insurance broker like McClarrons, who work with an array of businesses across a multitude of industries, can be beneficial in helping you assess the adequacy of your insurance protection and understand how it would react in the event of a claim. To discuss your business insurance with us, contact our Commercial Team at commercial@mcclarroninsurance.com or at 01653 609151.
In our ‘Understanding Business Interruption Insurance’ blog, you can find a more in-depth summary of what it is, how it works, the potential pitfalls to avoid when arranging it, and how to approach Business Interruption Insurance for your own business needs, which you can read here.
Published Sept 2024. Updated Jan 2026.
