What is an indemnity period?
The indemnity period is the maximum length of time your business interruption insurance will compensate you after an insured event. It starts from the date of the loss and runs until your business is fully restored - or until the indemnity period expires, whichever comes first.
If your business takes longer to recover than your indemnity period allows, you stop receiving payments. The remaining loss falls on you.
Why 12 months is rarely enough
The most common indemnity period selected is 12 months. It’s also the most common cause of underinsurance in business interruption claims.
Consider what happens after a major fire at a warehouse:
- Weeks 1-4: Assessment, salvage, insurance claim lodgement
- Months 2-3: Demolition and site clearance
- Months 3-4: Design and council approval for rebuild
- Months 5-10: Construction
- Months 10-12: Fit-out, equipment installation, stock replenishment
- Months 12-15: Ramp back up to full trading capacity
In this scenario, 12 months barely covers the rebuild - let alone the time needed to win back customers and return to pre-loss revenue levels.
How to choose the right period
The right indemnity period depends on three factors:
1. Rebuild time
How long would it take to rebuild or repair your premises after a worst-case event (total loss)? Consider:
- Heritage or complex construction that takes longer
- Council approval timelines in your area
- Availability of specialist contractors
- Supply chain delays for equipment or materials
2. Recovery time
After the premises are rebuilt, how long before your business returns to normal revenue? Consider:
- Customer relationships - will clients wait, or go to competitors?
- Supply chain re-establishment
- Staff re-hiring and training
- Marketing to rebuild brand presence
3. Buffer
Add a buffer for the unexpected: construction delays, weather, disputes with builders, equipment lead times from overseas manufacturers.
Common indemnity periods
- 12 months: Small, simple businesses that can relocate quickly
- 18 months: Standard for most commercial operations
- 24 months: Recommended for manufacturing, warehousing, and complex operations
- 36 months: Large or specialised operations, heritage buildings, or businesses with long customer recovery times
The cost of getting it wrong
Extending your indemnity period from 12 to 24 months usually increases the business interruption premium by a modest amount relative to the underlying BI rate. The specific uplift varies by insurer, industry and risk profile. Your broker can give you the exact differential for your risk before you decide. Either way, the premium delta is usually modest against the alternative: absorbing months of lost revenue yourself because cover ran out before the business recovered.
Our recommendation
For most ISR policyholders, we recommend a minimum 18-month indemnity period, with 24 months for manufacturing and warehousing operations. If your premises involves specialised construction or your business would take time to win back customers after a closure, consider 36 months.
Your broker should review your indemnity period annually. As your business grows, your recovery time may increase - and your indemnity period should keep pace.