What to Know about Business Interruption Insurance
Business interruptions are inevitable. Uncontrollable circumstances such as fires and storms can cause damage to business infrastructure and cause operations to be shut down for a prolonged period. According to data, winter storms such as Uri caused $15 billion in insured losses across the U.S.
Your business shouldn’t have to take the financial brunt of unexpected business interruptions. Business interruption coverage protects against financial losses during these periods when your business cannot operate due to various perils.
What is Business Interruption Insurance?
Business interruption insurance is an insurance coverage that replaces lost income by a business due to a disaster. This event could be a fire or a natural calamity such as a storm.
Business interruption insurance is typically bundled with a property or casualty policy within a comprehensive business insurance package. Therefore, most insurers offer it as a rider or add-on policy.
Business interruption insurance only pays out when the cause of the income loss is covered by the underlying policy. Previous financial records typically determine the amount payable to the business.
Most business interruption insurance policies last until the end of the business interruption period, which is determined by the policy. Typically, most standard policies last up to 30 days. However, if you use an endorsement, the interruption period can extend to 360 days.
What Does Business Interruption Insurance Cover?
Business interruption insurance helps cover the following business operating expenses if you’re forced to shut down by a covered peril.
Rent, mortgage, and lease payments for the space your business operates from
Revenue you’d typically make if the business were open
Taxes that you pay monthly or quarterly
Loan payments that you should make during the shutdown period
Relocation costs if you must move to a new or temporary location
Payroll for employees
Training costs for employees to learn how to use new equipment and machinery after a covered loss
Extra expenses to get the business back and running, such as renting another space
In rare cases, business interruption insurance may cover losses and expenses resulting from your business being shut down by a civil authority due to physical damage to a nearby business.
Most business interruption insurance policies kick in within 48 – 72 hours.
What Isn’t Covered by Business Interruption Insurance?
Most business interruption insurance policies come with various exclusions. Here are the most common ones.
Undocumented income not listed in your financial records
Damage from earthquakes or floods since they require separate policies
Closure due to communicable diseases
Utilities, since they’re typically shut off during business repair
Damaged property, typically covered under commercial property insurance
The Different Types of Business Interruption Insurance
Business interruption insurance includes various types of coverage, such as business income coverage, contingent business interruption coverage, extra expense coverage, and civil authority coverage.
The coverage you choose will limit your compensation and for what reasons. Therefore, when selecting your policy, you must be considerate to ensure you’ve included the relevant types to give your business comprehensive protection.
Here’s a breakdown of each business interruption insurance coverage.
Business Income Coverage
This cover helps replace lost income and pay ongoing expenses if your business must shut down temporarily due to a covered loss. Therefore, it will compensate for missed profits, rent, payroll, taxes, and other operating costs.
Contingent Business Interruption Coverage
This coverage protects your company from losses resulting from the disruption in operations of a supplier or another business partner your company relies on. For instance, if a fire prevents your supplier from delivering goods to your company, contingent business interruption coverage can help cover the losses incurred.
Extra Expense Coverage
Extra expense coverage helps cover the additional costs your company may incur to avoid or minimize a shutdown. This includes renting out a temporary office space or equipment, temporary transportation, paying non-exempt staff overtime, and temporary relocation.
Civil Authority Coverage
This type of business interruption insurance coverage helps protect your firm from losses resulting from government-mandated closures or other civil limitations preventing operations. For instance, your firm may be forced to close due to a curfew or mandatory evacuation order issued by the local authorities.
How Much Business Interruption Insurance Coverage Do You Need?
Every business interruption insurance coverage has a coverage limit. This is the maximum coverage you can get from the policy in case of a loss.
Therefore, you must determine how much business interruption insurance your business needs to ensure the best coverage. The standard rule of thumb is to use your business’s projections and gross earnings to estimate future income and determine the coverage necessary.
If your business interruption costs exceed the coverage limit, you’ll have to pay for the extra expenses out of pocket.
Some of the questions you can ask yourself to estimate your coverage needs better include:
Can you find a temporary space to rent for your business in case of shutdown?
Does your business’s premises have a well-maintained fire alarm or sprinklers?
How long will your company need to recover from a physical loss or damage?
How Much Does Business Interruption Insurance Cost?
Business interruption insurance costs depend on various factors, such as the number of employees your business has, your industry, and the amount of coverage you choose. The cost will also vary depending on your risk of making a claim and the business location.
Typically, a business interruption insurance policy can cost between $40 and $130 monthly, accumulating to $480 and $1560 annually.
Which Kind of Businesses Need Business Interruption Insurance?
Business interruption insurance is a recommended policy for most small business owners. However, it is more crucial for businesses that rely on a physical location or assets such as equipment and machinery for operations, which are susceptible to theft, fire, lightning, wind, and falling objects.
Therefore, some of the prime businesses for this policy include restaurants, salons and spas, retail stores, yoga studios, and dog groomers.
Choose the Best Coverage Based on Your Business Needs
Business interruption insurance coverage is an insurance policy designed to ensure natural perils and disasters such as fire and storms don’t result in a total income loss for your business. With this coverage, you can get financial coverage for operating expenses and financial aid to help set up your business in a new location temporarily to avoid a total shutdown.
Talk to an insurance expert today and learn which business interruption insurance policy best suits your enterprise.