Business Interruption insurance is a type of coverage that a business owner turns to when they are forced to close their business for a period.
The reasons behind this “non-voluntary” closure could be internal or external factors that make owners lose their ability to generate sales and income.
- Internals: such as a gas leak, a fallen tree, a broken water pipe, etc. Scenarios that force a company to stop business for an amount of time that depends on how long the reparations will take. This can also refer to internal staff problems and theft.
- Externals: natural disasters such as the COVID-19 pandemic or extreme weather. These are some of the external factors that force companies to shout down temporarily.
Being closed can be a challenge for business owners. This is why having Business Interruption Insurance is so important. With the replacement of lost income while the business is closed it allows to pay employees, hidden expenses, taxes and vendors.
This policy is usually included on comprehensive insurance and in property & casualty coverages. The only case that Business Interruption insurance is not considered is when the reason for closing is originated in a government order or mandate. In these cases, the business is covered by the civil authority coverage.
What does business interruption insurance cover?
As a practical example, let us say Joe has started a bakery. He hired Business Interruption insurance along with this property and casualty coverage. If one of the ovens had a leak and the bakery was for to close for a brief period, the business interruption insurance would reimburse them. There is a waiting period before the coverage kicks in, but once those 48 to 72 hours have passed, Joe will receive indemnification from his insurance provider. If, on the contrary, the situation was that the street where Joe works had to be closed for repairs, he would not get coverage for business interruption for those five days.
According to the Insurance Information Institute, an association dedicated to explore the latest discussions in the insurance world: “Business Interruption insurance coverage can help with operating expenses during the period of restoration.”
Business Interruption Insurance can cover numerous expenses which can vary from policy to policy. They are standard items that are covered in policies as well as recurrent exclusions.
According to the specialize website in Insurance resources for small businesses, The Balance, a loss in income is covered when these conditions are present:
- There is an income loss originated in a necessary shut down.
- The suspension was caused by a physical loss caused by a covered peril.
- The cease of activities occurred during the period of restauration.
- The damaged occurred in the premises described in the policy.
If all those conditions are met, ‘Business Interruption’ kick in and the coverage will pay for following expenses:
- Profits: where prior months will act as examples. The policy will reimburse the policy holder for the profits the business ‘would have made’ if the event had not occurred.
- Fixed costs: also known as Operating expenses. They do not include utilities.
- Taxes: which business are required to pay regardless of if they must be closed.
- Loan Payments: If the business has debt, this insurance coverage will pay the month-to-month expense as to not generate interest.
- Commission and Training costs: in the event there’s machinery to be replaced or personnel to be retrained.
What is not covered by Business Interruption Insurance?
There are several exclusions to consider that Business Interruption Insurance will not pay for:
- Damage from Earthquakes or floods because they require separate insurance policies.
- Income that was not listed on financial records.
- Utilities: because they are charged per use and they are usually off during repair.
- Communicable Diseases: because they leave no traceable damage, and if they do it is extremely hard to prove.
- Broken Items resulting from a covered event.
Are there Complementary Policies to ‘business interruption’ insurance?
Now that you know how business interruption works, the next step is to review the complementary policies that would extend insured protection beyond standard parameters:
- Dependent Properties Insurance: This acts in the case of damage of non-owned property.
- Extra expense insurance: will cover anything beyond the standard expenses. Examples include Renting a temporary location, paying overtime for employees, replacing furniture or Leasing Equipment.
- Civil Authority coverage: as detailed above, civil authority coverage applies when a civil authority impedes access to the business due to a government order (this may require actual physical loss to kick in).
- Utility Services Endorsement: Extends the Business Interruption coverage to cover utilities.
Business Interruption Insurance: A Requirement or a Necessity?
Now that you know how business interruption works, the next step is to review the complementary policies
You would never consider opening a business without first insuring it with a commercial general liability policy to ensure coverage for the costs of damage or repairs in case of an occurrence. The same line of thinking applies to Business Interruption. To keep the business afloat in the case of temporarily shut down, Business Interruption lets the business owner comply with expenses that otherwise they would not be able to face.
The main question to ask is “how much can my business withstand a period without revenue?” Depending on the answer, you should look for the appropriate coverage and always have your policies up to date.
Although it is not required by law, Business owners should make sure the policy limits are sufficient to cover their company for more than a few days of forced closure.
A general rule that will help you decided the type of coverage you would need is to estimate future profits and determine the right amount of coverage. Remember, if business income (interruption) costs exceed the coverage limit chosen, the business owner will have to pay out of pocket for any extra expenses. Business Interruption Insurance provides protection to your business.