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Calculating Coverage: Determining How Much Business Interruption Insurance Your Company Needs

By Darragh Timlin on April 23rd, 2024

Business interruption insurance is a critical type of insurance coverage that helps protect companies from unexpected events that halt normal operations. Having adequate business interruption insurance can make the difference between temporarily shutting down or going out of business for good when disasters strike.

Brisco Business provides an in-depth guide to how much business interruption insurance your company needs.

What is Business Interruption Insurance Cover?

Business interruption insurance, sometimes called business income insurance, is a type of business insurance that covers the loss of income and operating expenses when damage or disasters prevent normal business operations. It helps replace lost income so the business can pay ongoing costs until operations resume. 

Common “covered perils” include fires, natural disasters, equipment breakdowns or supply chain disruptions. With proper business interruption cover, companies can rebuild and reopen instead of permanently closing.

How Much Coverage Should You Purchase?

Every business interruption insurance policy provides a coverage limit up to a set maximum amount, which caps total claim payouts. Choosing the right amount of coverage involves calculating likely income and fixed cost losses if operations are halted. Consider:

  • Length of disruption: More complex operations may require months before resuming, necessitating higher cover for long income gaps.
  • Profits data: Estimate average monthly profits over the last 1-3 years, then determine coverage sufficient to replace multiple months of lost profits.
  • Operating costs: Tally all ongoing expenses like rent, payroll, loans, taxes and utilities that continue even when closed. The policy must cover these to prevent bankruptcy.
  • Recovery times: Factor in output loss even after reopening if there is reduced capacity or productivity interrupted. This extends income shortfalls beyond just closure periods.

Inadequate coverage caps the risk of bankruptcy from uninsured losses exceeding limits, but excessive coverage wastes premiums without improving payouts. Consult insurance professionals to ensure appropriate calculations.

Components of Business Interruption Insurance

Typical business interruption insurance policies have several key sections:

  • Gross profit coverage equals the income directly lost when operations cease plus increased costs of working. This protects net earnings.
  • Fixed costs coverage provides vital cash flow to pay major ongoing bills like rent, utilities and employee wages, even with zero sales.
  • Extra expense coverage pays temporary relocation costs, equipment rentals, expanded marketing and other costs above normal operating expenses just to resume operations after incidents. It enables getting back up and running smoothly.
  • Contingent business interruption coverage protects against lost income when damage to third-party property rather than your own premises disrupts your operations, like if a key supplier had a fire. This covers complex ripple effects.
  • Extended business interruption coverage expands the coverage period beyond when premises repairs finish to account for ramp-up time to full capacity. This protects gradual return to normal revenues.

Factoring in Deductibles

Most policies have deductibles that require paying initial claim costs out-of-pocket up to fixed thresholds before coverages activate. While high deductibles reduce monthly premiums, too high leaves businesses struggling with substantial unrestorable costs before insurance helps cover further expenses. Set deductibles based on emergency business savings levels.

Getting Your Business Interruption Assessment

Working with qualified insurance agents and brokers familiar with your sector remains vital for customising advantageous policy terms and properly setting coverage limits aligned with potential earnings impacts. Discuss risk likelihoods and realistic disaster scenarios to determine suitable business interruption coverage.

Get Comprehensive Cover with Brisco Business

Here at Brisco Business, we offer tailored business interruption insurance quotes across a range of top UK insurers. With decades of experience supporting companies across all sectors, we can advise on coverage levels, risk factors impacting premiums and policy extensions to protect your business against disruptions. 

Get in touch for a quote today to evaluate your insurance needs and get expert guidance regarding business interruption.

Darragh Timlin

With over 25 years’ experience, Darragh is an expert in all things insurance. Starting his career in commercial property underwriting, Darragh has worked for a number of global insurers and is now Managing Director of Brisco Business, part of the wider Henry Seymour Group.

All articles by Darragh Timlin

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