INSURANCE GUIDE Business Interruption Insurance - what it covers and how BI claims work |
TL;DR
- Business interruption (BI) insurance pays lost gross profit and fixed costs while a business cannot operate normally following physical damage to the insured premises.
- BI requires a material damage trigger - there must be physical damage to the property covered by the material damage (buildings/contents) policy for the BI to respond.
- The COVID-19 Supreme Court test case (FCA v Arch Insurance, Jan 2021) established that some BI policies with disease and denial of access extensions did cover pandemic losses.
- The indemnity period is the maximum length of time for which BI pays - it must be long enough to cover full recovery, not just the time to rebuild.
- BI is frequently underinsured - businesses set the gross profit sum or indemnity period too low, resulting in inadequate claim settlements.
Last reviewed: June 2026
KEY FACTS | |
| What triggers BI | Physical damage to insured property by an insured peril (fire, flood, storm, escape of water, etc.) |
| Material damage requirement | BI cannot be claimed without physical damage to the insured property - there must be a linked material damage claim |
| COVID-19 test case | FCA v Arch Insurance UK Ltd [2021] UKSC 1 - Supreme Court ruled certain disease and NDAC extensions covered pandemic losses |
| Indemnity period | The maximum period for which BI pays following a loss - should reflect time to full recovery, not just physical reinstatement |
| Gross profit definition | BI gross profit = turnover minus variable costs (inputs that reduce proportionately with turnover during the interruption) |
| Annual premium range | Typically 10-25% of the total property premium for equivalent cover |
What Is Business Interruption Insurance?
Business interruption (BI) insurance - also called business income insurance or loss of profits insurance - compensates a business for the net profit lost and fixed costs incurred while the business cannot operate normally following physical damage to its premises or equipment. It is almost always sold in conjunction with commercial property insurance (buildings and contents) rather than as a standalone product.
The principle of BI is straightforward: after a fire, flood, or other insured event damages the business premises, the business cannot trade while repairs or reinstatement take place. During this period, the business continues to incur fixed costs (rent, salaries, loan repayments) but cannot generate revenue. BI insurance bridges the gap by paying the gross profit that would have been earned and the fixed costs that continue to be incurred during the interruption period.
KEY FACTS
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The Material Damage Requirement
A fundamental feature of standard BI policies is that they require physical damage to an insured property as a precondition for the BI cover to be triggered. This is called the material damage proviso. If the business premises cannot be accessed for reasons other than physical damage (for example, a government lockdown, a neighbouring building fire that does not spread, or a utilities failure) the standard BI policy will not respond.
Extensions to standard BI policies can address some of these gaps. Denial of access extensions cover interruption caused by inability to access the premises (without physical damage). Disease extensions cover interruption caused by a notifiable disease at the premises. Utilities failure extensions cover interruption from failure of external utilities. Whether these extensions are broad enough to cover specific scenarios depends on the exact policy wording - the COVID-19 test case demonstrated that clause wording differences of a few words can determine coverage of very large claims.
The COVID-19 Test Case
FCA v Arch Insurance UK Ltd [2021] UKSC 1 was a test case brought by the FCA on behalf of small business policyholders to determine whether BI policies responded to COVID-19 losses. The Supreme Court ruled in January 2021 that most disease clauses, prevention of access clauses, and certain hybrid clauses in the test policies covered losses caused by COVID-19 restrictions. This resulted in approximately GBP 1.2 billion in BI claims being paid to around 370,000 businesses.
The case has implications for how BI policy wordings are drafted and interpreted. The key lesson for businesses is that the wording of the BI extensions - not just their existence - determines whether a claim is covered. A BI policy that includes a disease extension may or may not cover a future pandemic depending on the precise wording of the clause.
Setting the Right Indemnity Period
The indemnity period is the maximum time for which BI will pay following a loss. Most businesses choose 12 months as a standard indemnity period. For most businesses, this is too short. The indemnity period should cover:
- The time to reinstate or rebuild the physical premises (which itself can be 12-24 months for a significant loss)
- Plus the time needed to rebuild the customer base, re-hire staff, and return to pre-loss trading levels after reopening
A restaurant that takes 18 months to rebuild after a kitchen fire and then needs a further 6-12 months to rebuild its customer base needs a 24-36 month indemnity period, not 12 months. Choosing an insufficient indemnity period is one of the most common causes of BI underinsurance.
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Disclaimer: This guide is for general information only. Kael Tripton Ltd is not authorised or regulated by the FCA. Always verify details with an FCA-authorised insurer or broker before purchasing. |
Frequently Asked Questions
Does BI insurance cover pandemic losses?
It depends entirely on the policy wording. The COVID-19 test case (FCA v Arch [2021] UKSC 1) established that some BI policies with disease extensions and prevention of access clauses did cover pandemic losses. Many standard BI policies without these extensions did not respond. Post-COVID BI policies often have tighter pandemic exclusions. Check the specific policy extensions and exclusions carefully.
What is the difference between gross profit and net profit in BI?
For BI purposes, gross profit is defined specifically in the policy and typically means turnover minus variable costs (costs that reduce proportionately when trading is interrupted, such as cost of goods sold). It is not the same as accounting gross profit or net profit. Fixed costs (rent, salaries, loan interest) are included in the BI gross profit because they continue during the interruption. Setting the BI sum insured based on accounting net profit significantly underinsures the business.
Does BI cover the cost of setting up a temporary premises?
Increased cost of working (ICOW) covers the additional costs incurred to maintain trading during the interruption period, including the cost of temporary premises, equipment hire, and additional staff. Standard BI pays lost gross profit; ICOW pays the extra costs of working around the loss. Both sections together provide comprehensive BI cover. ICOW is usually included within the BI policy as an extension or separate section.
What happens if my indemnity period is not long enough?
If the business has not returned to full pre-loss trading levels before the indemnity period expires, the BI payments stop regardless of ongoing losses. The remaining shortfall is not covered. For businesses that underestimate their recovery time, this can mean significant uninsured losses in the later stages of recovery. Choosing a realistic (or conservative) indemnity period is the single most important decision in BI cover.
Does BI cover losses if a key supplier or customer suffers a loss?
Standard BI does not cover losses arising from events at third-party premises. Contingent business interruption (CBI) is an extension that covers losses arising from damage to the premises of key named suppliers (supplier CBI) or key named customers (customer CBI). CBI is available as an extension from most commercial property insurers and is particularly relevant for businesses with concentrated supply chains or customer bases.
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