Understanding Business Interruption Insurance
No business owner wants to face an unexpected interruption to operations, but facing a disaster without tools to aid in business recovery can make a bad situation even more stressful. Business interruption insurance coverage can help ensure that your venture withstands a disaster and has the funds necessary for repairs or rebuilding after the storm.
What is business interruption insurance?
Business interruption insurance, also known as business income insurance, covers the loss of income that stems from a covered loss on the policy.
What does business interruption insurance cover?
While property insurance covers the cost of repairs to your damaged building, it won't cover the potential income lost due to temporarily closing your business while the repairs are being made. Business interruption insurance acts as a stopgap during this recovery period so your business doesn't experience an even more catastrophic loss. Specifically, a business interruption insurance policy will typically cover the following:
- Revenue — If your business has records verifying your income patterns, a business interruption policy can provide the funds your business would have received during any closure periods as a result of the disaster.
- Rent or lease payments — Many standard rental or lease agreements do not suspend monthly payments due to acts of nature. Even if the building you are renting becomes unusable from storm damage or some other disaster, it is likely you will still be responsible for keeping up with your monthly rental or lease payments. Fortunately, a business interruption policy can cover this cost while the building is being repaired.
- Employee wages — Many employees cannot afford to be temporarily laid off for several weeks or even months during a business closure. Business interruption insurance can cover the cost of wages for your employees so your business doesn't have to hire an entirely new staff once it is able to reopen.
- Taxes — Even when facing a disaster, your business is required to make all quarterly and yearly tax payments on time or it could face extensive penalties and late fees. Business interruption insurance can cover business tax payments to help avoid any trouble with the IRS during the recovery period.
- Loan payments — If your business owes loan payments on financing capital, equipment, or other monthly loans, a business interruption policy can cover the cost of the monthly loan payments until your business can reopen.
What does business interruption insurance not cover?
While a business interruption policy can cover many things not covered by other traditional liability policies, there are a few costs that are typically excluded from extra expense coverage:
- Undocumented income — Even if your company was planning on landing an account in the future, projected or undocumented income is generally not compensable with a business insurance policy. It's important to maintain accurate records of your revenue patterns, especially as your business grows.
- Losses from a partial closure — If your business can still operate and receive customers while repairs are being made to a specific section of the building, extra expense coverage typically won't cover lost income or other operational losses.
- Non-covered damages — Many business interruption policies won't cover flood damage, especially if it is not due to a natural disaster. Check any policies you are considering for details on specific exclusions, such as earthquakes, electrical fires, or voluntary closings.
- Monthly costs for public utilities — During a repair period, public utilities are often shut off to the building for safety reasons, so this cost is typically excluded from a business interruption policy.
- Temporary closures of less than 72 hours — Most policies require the closures to have a significant impact, typically defined as 72 hours or more, before losses are covered. Temporary closures due to things like downed power lines or closed roadways are often excluded.
How much coverage does your business need?
The cost of a business interruption policy will vary with the location, degree of risk, and amount of coverage desired. Choosing a policy with lower coverage limits can reduce the cost of your policy, but it will also provide fewer benefits in the event of a disaster. Rightsizing your coverage limits with your business needs is important to avoid overpaying for insurance protection on an incident that may never happen. It's also crucial to verify that your business has adequate coverage to recover from a disaster if and when one occurs.
To determine the amount of coverage that is right for your business, consider the following questions:
- How long would it take to get my business up and running after a loss? The length of time you will need business interruption coverage is a major consideration to how much protection you will need.
- How protected is my current building? If your business is located in an unsafe area or is particularly exposed to weather elements, you may need more coverage than the average business.
- Does my business have proper safety measures in place to help safeguard against loss from a disaster? Sprinkler systems and other safety measure can help minimize your risk of fire and other effects of natural disasters, thus minimizing your risk.
- If I needed to temporarily relocate my business after a disaster, what would that process look like? Moving expenses can be costly, so be sure to consider that when estimating your coverage needs.
Protecting your business
Exploring the answers to these questions with a reputable insurance professional can help you identify the proper amount of business interruption coverage required for a suitable recovery period. This coverage can be included with either a general liability insurance plan or a business owner's policy (BOP) for well-rounded protection of your business in a variety of circumstances.
Although natural disasters are frustrating and stressful, they don't have to be disastrous for your business. Visit our Business Insurance page to learn more about ensuring your business is protected against these potential interruptions.