Business interruption insurance: what it covers and what it does not
Business interruption insurance pays for lost revenue and fixed costs when a covered event forces your business to stop operating. Understanding its scope — and its exclusions — is critical before a claim arises.
What business interruption insurance covers
Business interruption (BI) insurance — also called business income insurance — is designed to put your business in the same financial position it would have been in had the insured event not occurred. It covers two core categories of loss:
The income your business would have generated during the period it cannot trade, calculated against historical performance and adjusted for trends.
Additional expenses you incur to minimise the interruption — temporary premises rental, expediting equipment replacement, overtime for staff.
Unavoidable overheads that continue even when trading has stopped: rent, loan repayments, utility standing charges, staff wages.
Some policies cover amounts owed to you that cannot be collected because your records were destroyed in the insured event.
BI cover is typically a component of a commercial combined policy alongside buildings, contents, and liability cover — though it can also be purchased as a standalone extension. It does not stand alone: standard BI policies only pay out following an insured physical damage event (fire, flood, storm, theft) that triggers the underlying property policy.
Common exclusions and gaps
Understanding what BI does not cover is as important as understanding what it does. The most common gaps that catch businesses out:
- No physical damage trigger. Losses from power outages, IT failure, or supply chain disruption caused by a supplier's non-physical event — none of these trigger a standard BI policy unless physical damage to your own property occurs first.
- Cyber events (standard exclusion). A ransomware attack that shuts down your operations is typically excluded from standard BI. Dedicated cyber insurance is required for this exposure.
- Pandemic without a disease extension. As litigation post-2020 confirmed, the standard material damage BI policy did not respond to enforced pandemic closures.
- Indemnity period exhausted before recovery. If your indemnity period ends before your business has fully recovered, remaining losses fall on you. Choose a period that reflects your realistic worst-case recovery timeline.
- Under-insured gross profit. If the declared gross profit is too low, the insurer applies a proportional reduction to any claim — the same average clause principle as buildings and contents.
Choosing the right indemnity period
The indemnity period is the single most important variable in a BI policy. Most insurers offer 12, 18, 24, or 36 months. The correct choice depends on:
- How long it would take to rebuild or replace your premises and specialist equipment
- How long your customer base would wait before going elsewhere
- Whether your business has an industry-specific recovery profile (e.g., a restaurant that requires planning permission to rebuild)
For most small businesses, 24 months is the minimum advisable indemnity period. For manufacturing, hospitality, and businesses in premises subject to planning constraints, 36 months is often more appropriate. See our guide to understanding policy limits for the broader principle of choosing cover amounts that reflect real exposure.
Business interruption FAQ
Frequently asked questions
- This became heavily litigated during 2020–2021. The UK Supreme Court's FCA test case ruling found that some disease and denial-of-access extensions did cover pandemic-related closures, but only where the policy wording was sufficiently broad. Standard "material damage" triggered BI policies — which require physical damage to property as a precondition — generally did not respond to pandemic closures. Any post-2021 policy should be reviewed carefully for pandemic exclusions.
- The indemnity period is the maximum time over which the insurer will pay for lost revenue and additional expenses — typically 12, 24, or 36 months. Critically, it runs from the date of the insured event, not from when your business returns to full trading capacity. If rebuilding your premises or replacing specialist equipment takes 18 months but your indemnity period is 12 months, you are uninsured for the final 6 months of recovery. Most insurance advisers recommend a minimum 24-month indemnity period. See the indemnity glossary entry for the broader principle.
- Most UK BI policies insure "gross profit" — defined in insurance terms as turnover minus purchases and other variable costs. This is different from the accounting definition of gross profit. The insurance gross profit figure is typically higher than the accounting equivalent because it excludes fewer variable costs. If you understate this figure on your application, you risk under-insurance and a proportionally reduced claim. Always base the insured gross profit on your most recent accounts plus a growth buffer.
- Standard BI policies require physical damage to your own insured premises to trigger a payout. However, contingent business interruption (CBI) extensions can cover losses caused by physical damage to key suppliers or customers. CBI is an optional add-on and typically requires you to name the specific supplier or customer at the policy inception. Unnamed or unnamed-area CBI extensions provide broader cover but at higher cost.