Most Australian business owners understand the need for insurance to replace property and equipment damaged in an unforeseen event. It’s surprising, then, that so many forget (or fail) to take out business interruption (BI) insurance for financial losses from the same events.
Business interruption insurance is a lifeline when events outside your control close your doors.
It pays to be protected in an era when “business as usual” is anything but usual.
This guide will take you through the ins and outs of business interruption insurance, including:
- Understanding this type of cover
- What to look for in a business interruption insurance quote
- What is and is not covered
- Why a tailored business insurance policy is essential
If you own or manage an Australian enterprise, this guide to business interruption insurance is for you.
What is business interruption insurance?
Business interruption insurance covers lost income and expenses when companies are forced to close.
Events like bushfires, severe storms, damage to a neighbouring property and government mandates can all bring business to a halt. But even though trading stops, the expenses do not.
Outgoings like rent, wages, utility bills and taxes continue rolling in. With no income, these dues quickly overwhelm small businesses to the point they might be forced to fold.
When an insured event brings trading to a halt, business interruption insurance keeps Australians employed and covers expenses to prevent the business from folding.
Who needs business interruption insurance?
The short answer is every Australian company should consider taking out business interruption insurance.
If the last two years have taught us anything, it’s to prepare for the unexpected.
Natural disasters cost Australians more than $18 billion per year. However, the variability of insured events shows there is no one-size-fits-all for disaster readiness.
Bushfires and floods tore across the country in 2019. The following year, hail and storms caused the most damage.
- 99.8% of Australian businesses are small to medium enterprises (SMEs)
- Australian SMEs employ 5.6 million people
- 13% of SMEs are not insured
- 1.9% are underinsured
Continuing to stay afloat without business interruption insurance puts immense financial strain on SMEs. There is nothing more heartbreaking for a small business owner than having to lay off staff, give up a storefront, sell equipment or take a bridging loan just to hang on.
Regular business insurance policies cover the physical damage these unforeseen events cause.
Business interruption insurance is an additional layer of protection for the financial strain incurred when a business closes its doors.
Both should be part of your business continuity plan.
What does business interruption insurance cover?
Each insurance policy (and claim) is unique, and the following should not be considered legal advice. In general, you can make a business interruption insurance claim for:
- Lost revenue
Income lost during the forced closure period. Revenue and profits are generally calculated on historical performance.
- Ongoing expenses
Outgoings like rent, payroll, taxes, utility bills, equipment hire and business loans that are part of day-to-day operations.
- Temporary relocation costs
Costs incurred when damage to the business’ premises, or a neighbouring premises, forces the company to temporarily operate from another location.
Training and setup costs when the business can resume trading after the event.
- Reasonable extra expenses
Outgoings over and above the business’ fixed costs, such as extraneous loan payments or additional tax dues.
You might hear the cover called “business income insurance” or “loss of profits insurance”, which can help to keep the physical and financial cover separate in your mind.
What isn’t covered?
Business interruption insurance is not a standalone policy. Instead, it supplements broader business insurance policies.
That means it is not designed to cover:
- Worker’s compensation claims
- Personal income (with some caveats based on the business structure)
- Property and equipment damage
- Vehicle damage
- Theft and vandalism costs
- Public liability claims
These are all covered by other insurance types. However, if these events force a business to stop trading, income, outgoings, and associated costs might be covered.
The best way to know what your policy includes and excludes is to speak with a Connect Business Insurance expert.
When you start sourcing business interruption insurance quotes, one condition you will become familiar with is the indemnity period.
This is the length of time in which you can make a claim. Put another way, the indemnity period is how long you can continue claiming while your business is closed.
Most standard policies include an indemnity period of at least 30 days. However, it’s important not to underestimate the time it will take to get back on your feet.
With Connect Business Insurance, you can elect to extend your indemnity period to 12, 24 or 36 months or for a tailored length of time. You can discuss these conditions with an insurance expert when you contact us for a business interruption insurance quote.
Does business interruption insurance cover COVID-19 disruption?
Test cases before Australian courts have attempted to answer this question. Although no firm precedent was set in 2020 or 2021, initial rulings decided that business interruption insurance does not cover pandemic-related losses.
COVID-19 undoubtedly hit small businesses hard. Australian business owners will continue to feel the effects of the pandemic for years.
We are continually monitoring the decisions handed down by Australian courts and remain committed to supporting our customers.
What to look for in a business interruption insurance quote
Business interruption insurance – also called business income or lost profits insurance – is a lifeline when the unthinkable happens.
To recap, some essential components to look for in a policy include:
- Insured events
Natural disasters, damage to neighbouring premises, government mandates and other unforeseen events as defined in your company’s risk profile.
- Policy limits
How much you can claim for any one insured event or policy inclusion.
- Indemnity period
How long you can claim losses before business can re-start.
- Policy exclusions
What isn’t included, for example, pandemic-related losses or property damage claims.
Where you can access support and advice. The right insurance provider will be available when you need them.
- Tailored terms
Business interruption insurance should be tailored to your company’s risk profile. One-size-fits-all policies can leave you exposed to significant financial risk.
- A friendly insurance advisor
Connect Business Insurance puts our customers first. Our local insurance experts are happy to answer any questions you have at any time.