When a company suffers a serious disaster such as a fire or a tornado, its activity can be slowed down or even stop during the work. How to deal with this sudden drop in turnover without putting your company in danger Business interruption insurance helps businesses during this transition period. A useful guide.
Imagine your carpentry business falling victim to a fire. The building, stock, machines, everything has burned down. Conventional damage insurance guarantees the restoration of the building and equipment, and compensates you for the stock that has gone up in smoke.
But during the repairs, the company is unable to produce anything. However, wages, rent and interest on loans are all fixed charges that you must continue to pay even in the event of temporary cessation of your activity.
When a company suffers a serious disaster, it must not only face a temporary loss of turnover but must also face a period of winning back its customers. Companies capable of bearing such a financial burden on their own funds are rare. The proof is that 40% of those that have suffered a fire go bankrupt within three years. Business interruption insurance compensates for the loss of profit to keep the business afloat during and after work.
In other words, this insurance helps put you back in the same financial situation as before the disaster.
Most of the risks covered by multi-risk insurance can be covered by an additional policy covering business interruption: fire, explosion, attack, water damage, storm, machine breakdown, etc. Note that being insured against the risk does not cover the business interruption linked to this risk. This is additional cover to take out.
The business interruption cannot be applied to claims not covered by insurance. So, loss of turnover due to road works or social upheaval are excluded.
This insurance primarily concerns professionals who produce or hold stock, such as traders or craftsmen. For example, water damage in a restaurant or a gas oven exploding in a bakery can force these businesses to remain closed for several months, the time needed to put their professional tools back into working order.
If you carry out a service activity in an office, business interruption insurance is not necessarily required. To make a judgement, an analysis should be carried out beforehand: do not hesitate to seek advice from your insurer. In fact, it is sometimes possible to resume activities quickly after a major disaster. You will probably set up your office in a temporary place, without your business being disrupted.
The compensation period and the cover you need are to be defined when you take out your business interruption insurance policy. Depending on your activity, your advisor will help you ask the right questions: How quickly can your building be rebuilt? When can you replenish your stocks? How long will it take to get your customers back?
This insurance covers not only loss of profit but also the fixed costs of the business (wages, rents, loan repayments, taxes, etc.) which continue during reconstruction. Additional costs such as the rental of equipment or premises to temporarily relocate you, or the use of subcontractors for temporary production are also covered.
| Nature of the company's expenses | Covered by Business Interruption | Details and scope of application | Impact on the company's cash flow |
|---|---|---|---|
| Salaries & Social security contributions | YES (In full) | Continued payment of your employees’ salaries during the reconstruction period or forced closure. | Helps avoid emergency redundancies and preserves your workforce for when business resumes. |
| Commercial rents | YES (In full) | Cover for the rent on your offices, warehouses or shops if you have to continue paying it despite the forced closure. | Neutralises the financial burden of fixed property costs during the period of inactivity. |
| Taxes, duties & loans | YES (Subject to conditions) | Reimbursement of business loan instalments and unavoidable recurring taxes due during the interruption. | Maintains the company’s solvency with creditors and public authorities. |
| Emergency mitigation costs (Urgency) | YES (In full) | Financing of temporary solutions: rental of replacement premises, emergency IT equipment, crisis communication. | Allows you to maintain a minimum level of activity and inform your customers in order to limit loss of market share. |
| Net profit margin | YES (Based on history) | Payment of the forecast net profit that the company would normally have generated had the claim not occurred. | Helps shareholders and directors maintain profitability for the financial year. |
| Planned future investments | NO | Expansion projects, future acquisitions or investments not yet committed at the time of the claim are excluded. | These items relate to future business development and not immediate survival. |
| Fines and late-payment penalties | NO | Administrative or judicial penalties that predate the claim or are linked to personal breaches by the company director remain their responsibility. | Insurance does not replace the company’s legal and regulatory compliance obligations. |
The compensation for the loss of gross margin suffered by your company (i.e. its turnover minus variable costs) will be paid to you during the period of bringing your company back into service (often 12 months by default). The amount of this compensation is assessed by experts depending on the economic situation of the company before the disaster.
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