Updated · General information, not advice · TitanDC
It follows the material damage claim
Business interruption cover is usually triggered by damage that the underlying policy covers. If the fire, storm or impact is covered, the loss of income that follows can be covered too. If the damage itself is not covered, the interruption is not covered either, however real the lost income.
- The damage must be insured under the material damage section
- Cover responds to the consequences of that damage, not to a downturn
- If the damage is excluded, the related interruption claim generally fails too; some wordings still respond where the damage claim went unpaid only because it fell within the excess
- Some extensions respond to damage at a supplier or a customer, or to loss of access — but only if you have bought them
The indemnity period is the decision that matters most
The indemnity period is how long the policy keeps paying after the damage. It is chosen when the policy is taken out, and it is easy to set too short. Twelve months sounds generous until you count what a real recovery takes.
- Insurer assessment and agreement of the claim
- Demolition, clearing the site and obtaining approvals
- Rebuilding or refitting — the long part
- Replacing plant and equipment, some of it on long lead times
- Re-hiring and retraining staff who found other jobs
- Winning back customers who went elsewhere: the phase everyone forgets
- Compare realistic recovery scenarios of 12, 24 or more months; no single period suits every business
What the sum insured should represent
The figure is usually gross profit as the policy defines it, which is not the accounting definition. It is turnover less the costs that genuinely fall away when you stop trading, which means most fixed costs and wages stay in. It must also be projected over the indemnity period, not last year’s figure.
- Use the policy’s definition of gross profit, not the one in your accounts
- Include the costs that continue when trading stops: rent, salaries, finance, insurance
- Project forward across the whole indemnity period, including expected growth
- Check whether increased cost of working is included, and whether you need the additional increased cost of working extension beyond its economic limit
- Under-stating it triggers the same average clause that applies to buildings
What it typically does not cover
Business interruption is not a general safety net for a bad year. These are the limits people are surprised by.
- A downturn in trade with no insured physical damage behind it
- Damage excluded by the underlying policy
- Losses beyond the indemnity period, however far the recovery still has to go
- Contractual penalties or fines, unless specifically covered
- Deterioration of stock, unless the relevant extension is in place
Common questions
Does business interruption cover a drop in sales?+
Not on its own. Cover responds to loss of income following physical damage that the policy covers. A downturn with no insured damage behind it is a trading result, not an insured event.
What is an indemnity period?+
The maximum length of time the policy will pay for lost income after insured damage. It runs from the date of the damage until the business has recovered, or until the period expires — whichever comes first. Choosing it too short is costly, because cover stops when the period ends.
Is 12 months long enough?+
It depends on the business. A full recovery includes assessment, approvals, rebuilding, replacing equipment on lead times, re-staffing and winning customers back. For specialised premises or plant, 24 months or longer may be needed; compare realistic recovery scenarios with your adviser.
What is increased cost of working?+
Cover for the necessary extra expense of keeping trading after damage — renting temporary premises, hiring replacement equipment, paying for overtime. A gross-profit section usually includes it up to an economic limit, meaning the spend must not exceed the loss it avoids. Additional increased cost of working is a separate extension for qualifying spending beyond that limit.
Does the average clause apply to business interruption?+
Usually, where the wording provides for it: if the sum insured is less than the gross profit at risk over the indemnity period, the claim is reduced proportionately. Projecting the figure forward matters for that reason.
Sources
This page cites the legislation and regulators it relies on, so you can check it.
General information about business interruption insurance in South Africa, not advice. What is covered, the indemnity period and the basis of settlement depend on the policy wording. TitanDC is an authorised financial services provider, FSP 8972.