When a fire breaks out in a factory or warehouse, standard fire insurance pays for the physical reconstruction of the building and the replacement of damaged machinery or stock. However, during the months it takes to rebuild, the business cannot operate. Lost sales, standing charges (like salaries, rent, and loan interest), and rehabilitation costs can lead to insolvency. Consequential Loss insurance (also known as Business Interruption cover) is designed to protect your cash flow during this rebuilding phase.
Physical Damage vs Financial Loss
Standard property insurance covers material damage. Business Interruption covers the resulting financial loss. It begins from the day of the fire and continues for a specified 'indemnity period' (e.g., 6, 12, or 24 months) until the business restores normal operations. It pays for the net profit the business would have earned and covers fixed charges that must still be paid despite the shutdown.
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Setting the Indemnity Period Correctly
Choosing the correct indemnity period is the most critical decision under a Consequential Loss policy. If your business uses specialized imported machinery that takes 12 months to source, install, and certify, setting a 6-month indemnity period leaves you unprotected for the remaining 6 months of the shutdown. A detailed risk audit helps align the policy with actual supply-chain recovery timelines.
- Business Interruption cover requires an active material damage policy to be valid.
- The policy covers standing charges like employee salaries, bank interest, and municipal rent during reconstruction.
- Choose an indemnity period that matches your worst-case machinery replacement and structural rebuilding timelines.
- Keep audited financial books, tax filings, and sales logs secure to simplify loss calculations for the adjuster.