Remember the floods that virtually destroyed the Cornish town of Boscastle in 2004? How about the bomb that ripped the centre of Manchester apart in 1996?

In each case, many local businesses were severely affected.

As a businessman or woman, commonsense, if nothing else, tells you that to operate a business without insurance - whether buildings, contents, motor or employers - would be tantamount to commercial suicide. Yet why do so many businesses cover those elements but not cover their businesses against unforeseen interruption?

Business interruption insurance, BI, is what they are missing.

BI has many facets, but in its ultimate aim, it seeks to maintain the businesses profits in the event of disaster of some kind. The problem that all businesses face is that if, for example, the premises are flooded, destroyed in a fire, or blown up because of terrorist activity, time is required to get the business fully functioning again. Costs will still be incurred while production is down or non-existent - staff still need to be paid even though the business cannot use them in the short term.

This becomes particularly acute as the business is not in a state to bring in any money.

What is business interruption insurance?

BI operates in three ways.

Firstly, BI covers the fixed, or ongoing, costs of a business that cannot be met out of any financial reserves the company may have. The majority of these need to be paid irrespective of whether work is possible. This might include leasing and staffing costs, business rates, and mortgages that need to be paid.

Secondly, BI policies will cover any increased or new costs that are required to get the business up and running.

This could cover finding a new site, redirecting post and telephones, acquiring new equipment, paying overtime, using "friendly competitors" to complete orders, buying new supplies possibly at a higher rate, and advertisements to tell your customers of the temporary change in business circumstances.

Finally, a BI policy will pay enough money to maintain the level of net profits that the company had insured for.

What insurers look for Should a business need to claim on it BI policy, the directors or partners need to be aware that the insurers will need to see accounts before any payments are made.

Insurers use a variety of accepted accounting principles to establish their liability to pay a claim. They would look for information on variable costs such as raw materials, etc, that rise or fall depending on the required production/sales; data on fixed costs such as business rates - things that do not vary according to the level of sales; net profit; revenue levels; and gross profit - the difference between revenue and variable costs.

So make sure that once you've taken out a BI policy that you keep the documentation and detailed business accounts information safe because without the official paperwork you may have a devil of a job proving what you're entitled to.

It might seem bureaucratic at the time, but no insurer will pay out a claim unless the loss can be quantified. So if you have not got copies of your accounts, expect to have to prove the claim some other way.

Payment times do vary. It is difficult to quantify the time it takes to pay a claim since every case is different. However, insurers will process the claim on receipt of accounted losses so that they avoid any further liability for losses.

Check the policy

Whenever choosing a BI policy, or any other insurance policy for that matter, it is vital to check the wording used by the insurers. By their very nature, insurers use terminology which is neither vague nor open to confusion. For example, a policy may not cover any subsidiary companies so if a business acquires another, it will need to change the terms of the policy. It will detail what it will and what it will not pay for - make sure it matches your needs.

Reducing the premium

There are ways, as with any other type of insurance, of reducing the premiums charged.

Risk, and therefore premium, can be reduced by either greater fire protection or by separating areas of the working environment; by planning very carefully the organisation of the work processes; and by writing a detailed contingency plan.

The plan should cover actions to be taken following the disaster, keeping a detailed log of contact names and numbers of favoured contractors and suppliers who will help the business restart quickly. At the very minimum, the plan will show the business areas of risk where pre-emptive action can be taken. Update and test it regularly.

Other tips - make sure you regularly review the level of cover required. Insurers reckon that most policy holders are underinsured. If they find that this is the case with you, they'll only pay out a proportion of the claim. One way of preventing this is to make sure that the policy is declaration linked.

Premium Levels

Naturally, the amount you'll be charged for BI will depend on the type of business and the length of time that you'll want to be paid for. Insurers term this as the maximum indemnity period. However, you can expect to pay between £300 to £400 a year, based on a gross profit of £250,000 and depending on business sector and location.

It goes without saying that the premium is dependent on the information supplied by the proposer. Terrorism cover is generally excluded, but it can be bought as an additional option, again, depending on business sector and location will cost from £150 per year.

Adam Bernstein is a freelance business writer.