When disaster strikes, you could find yourself and your business drowning in a heap of bills. That’s why no one should open a business without purchasing business insurance.
You can also add extra coverage to your property or casualty insurance. One of the most useful additions is business interruption insurance.
Business interruption insurance covers your financials in the event of a disaster. This means you won’t go out of business when disaster strikes.
But how does business interruption insurance work? This guide will walk you through everything you need to know. Here’s why you should consider getting covered.
Table of Contents
What Is Business Interruption Insurance?
In its simplest terms, business interruption insurance replaces lost business income. This lost income must occur because of a covered event. Such events could include things like building fires, natural disasters, or extreme damages.
Usually, business interruption insurance is not offered as a separate policy. Instead, you can add it to a commercial property insurance policy. You can also get it as an add-on or rider in a comprehensive package policy.
When an insured business purchases business interruption coverage, the associated premiums are tax-deductible. The IRS classifies these premiums as ordinary business expenses.
Generally, providers review the past financial records of the business. This will determine the coverage payment amounts. Payments only happen for events covered by the underlying property insurance policy.
How Long Does Business Interruption Insurance Last?
The insurance policy will determine the length of the business interruption period. This is how long you will receive business interruption coverage.
The date the incident begins marks the beginning of the business interruption period. This period ends when the property is repaired or restored. This is also sometimes called the period of restoration.
Currently, the standard policy is 30 days. The Insurance Information Institute determined this standard. But, you can also use an endorsement to extend your coverage up to 360 days.
Additionally, you may face a waiting period of 48 to 72 hours before coverage kicks in.
Understanding Your Coverage
Business interruption insurance specifically covers loss of income. This means when forced to close your business, you will receive certain payouts.
But, it is important to understand what falls under business insurance. Coverages do not apply to every situation.
What Business Interruption Insurance Covers
In general, most business interruption insurance policies cover the same standard items. These usually include:
Your insurance provider will determine how profitable your business would have been. They’ll provide you with a payout for this amount.
Usually, they will determine this amount based on the prior month’s documented performance. This ensures you make roughly the same amount you would have if the event never happened.
Fixed Costs of the Business
Fixed costs generally include the typical operating expenses for the business. But, these can also cover the costs of other incurred expenses. Such expenses must be necessary to conduct business.
In some cases, certain policies will cover the costs of moving to a temporary location. They will also cover the costs of operating from this temporary business location.
Training and Commission Costs
Business interruption insurance will cover the cost of any damaged machinery. Damage to machinery must occur during a covered event to receive coverage. Coverage also applies to any training costs associated with machinery replacements.
You may find yourself faced with even more expenses. These could extend beyond those associated with your fixed costs. Business interruption insurance will cover these to a reasonable extent.
There are usually limits to how much extra expense coverage you will receive. Your policy provider will help determine these limits. But, the aim is to help you continue regular operations, despite physical damages.
Matters of Civil Authority
Government-mandated closures may occur. These could lead to financial losses for your business. In this case, business interruption insurance will provide coverage.
Examples of such events include things like curfews or street closures. Closures associated with public health crises are not covered under business interruption insurance. This means that closures related to the COVID-19 pandemic do not qualify for coverage.
The wages of your employees are also covered under business interruption insurance. This ensures you will not lose employees in the event of a covered business closure.
Even when struck by a disaster, businesses are still required to pay their taxes. To help make your payment on time, interruption insurance will cover the cost of your taxes. This can help your business avoid some serious tax penalties.
Like taxes, loan payments don’t stop because of a disaster. Unlike taxes, these payments are often monthly. This can mean serious trouble for business owners who are unable to operate.
But, you may use business interruption insurance to cover the cost of these loan payments. This ensures on-time payments. That means no penalties, even while you’re unable to generate income.
What Business Interruption Insurance Doesn’t Cover
Business interruption insurance is beneficial in that it covers quite a bit. But, there are still a few things that won’t receive coverage. It’s important to stay prepared by knowing what could become an out-of-pocket expense.
Uncovered emergencies, damages, or disasters include:
- Destruction of items or objects (such as glass) during a covered event
- Damage from floods or earthquakes usually need a separate policy
- Income not listed in your financial records
- Utility expenses
- Pandemics, viruses, or communicable diseases
It is especially important to note that events such as COVID-19 are not covered. But, there are still other ways to protect your business during pandemics.
Common Causes of Business Interruptions
Allianz Global Corporate and Specialty (AGCS) defines a few common causes for claims. Globally, fire and explosions account for a majority of these claims.
In the United States, the main causes of business interruption claims include:
- Fire and Explosion (50%)
- Storms (17%)
- Cast Lost, Entertainment Industry (9%)
- Other (24%)
AGCS calculated these figures based on research from 2010-2014. Other causes may include things such as cybersecurity hacks, equipment failure, and more.
Some interrupting events do not receive coverage. These events, listed above, include things such as earthquake damage or pandemic-related closures.
Key Concepts of Business Interruption Insurance
Individual interruption insurance policies will vary. But, all policies use similar language when describing insurance coverages.
As a business owner, it is imperative to understand a few key concepts. This ensures you are receiving the best possible insurance for your type of business. These concepts include:
Actual Loss Sustained
The actual loss sustained describes the amount your insurance provider will pay. This amount should cover most or all losses. But, there are a few important limits.
Your provider does not have to pay unless the business is unable to continue operations. The damage must occur during a policy-covered event.
Additionally, any policy limits or sub-limits could decrease the payout amount.
Insurance providers will be responsible for any lost business income. This is only if lost income happens because of a covered event. Providers generally define business income as:
- Net income that the insured would have earned
- Normal operating expenses, including payroll
Service interruption coverage is not included in every business interruption insurance policy. When included, it will provide coverage in the event of utility service-related interruptions. These cover third-party services which may not have coverage otherwise.
This means if physical damage occurs at your utility provider’s location, you’re covered. This damage must be the result of covered events. Typically, these are the same as those covered by standard business interruption insurance.
Restrictions for this type of coverage include:
- Distance limitations – damage must occur within a certain distance of your business
- Damages from events such as floods or earthquakes
- Damages to overhead distribution or transmission lines
A waiting period of 48 to 72 hours may apply until coverage kicks in.
Contingent Business Interruption (CBI)
This policy extension offers coverage if damage happens to a separate business. These damages must affect your ability to conduct business.
Say, for example, your meat supplier’s business faces an interruption. This could lead to financial loss in your own business. With a CBI extension, any financial losses related to your lack of meat will receive coverage.
Leader (Attraction) Property
This is another type of extension that provides coverage for third-party businesses. Included businesses must attract customers to your business or location.
Such businesses can include amusement parks, casinos, malls, and other tourist attractions. This type of risk insurance is advantageous in towns that are reliant on tourism.
Do I Need Business Interruption Insurance?
Very few business owners would open their doors without a property insurance policy. But, many of them fail to think about how a business interruption could affect profits.
Having business interruption insurance is extremely helpful for businesses of all sizes. This type of coverage is particularly useful for small- or medium-sized businesses.
Do your research before purchasing a business interruption extension. Make sure your policy limits are enough to provide coverage for more than a few days. Becoming operational again after a disaster can take longer than you may think.
Business Owner’s Policy (BOP)
A business owner’s policy is a common insurance bundle for small business owners. A BOP will bundle property, liability, and business interruption (or business income) insurance.
In general, coverage is less expensive when bundled into a package like a BOP. Bundles can also help your insurance provider set proper policy limits for you.
In most cases, a BOP is for companies with 100 employees or fewer. Revenues should also be $5 million or less to be eligible for BOP coverage.
Some types of businesses can face exclusions. For example, restaurants are usually excluded due to the elevated risk they represent.
How Much Coverage Do I Need?
You can try to calculate the level of coverage you’ll likely need. This is usually based on your business’s past gross earnings. You can also use estimates for your future earnings.
You will have to pay out-of-pocket for any damages exceeding your coverage amount. Because of this, it might be a good idea to buy more coverage than you think you’ll need.
How Much Does Coverage Cost?
The cost of your business interruption insurance coverage will vary. Some different factors affect coverage. These may include:
- The industry you’re in
- Number of employees
- Amount of coverage desired
- If you’ve had to file claims with your provider before
Coverage in some locations also costs more than in others. For example, areas at high risk for snowstorms, like Massachusetts, may have to pay more. This is because you represent more risk to the insurance provider.
Your industry also has a decent effect on your premium costs. Restaurants, for example, will likely have to pay more because of the higher risk of fire.
Meanwhile, somewhere like a real estate agency could pay less. This is because there are fewer risks. It’s also easier for real estate agents to work from a temporary location.
Keep Your Profits Steady With Business Interruption Insurance
Being a small business owner isn’t easy. And major disasters can make it even more difficult. You’ll want to avoid serious problems that can occur.
This is why you should consider investing in business interruption insurance.
Business interruption insurance covers your small business. This ensures that you’ll be ready to get back on your feet again in no time. When every penny counts, just a few days of coverage is monumental.
Request a quote from LoPriore today to make sure your business is covered. Business interruption insurance can’t protect you from everything. But, it can give you peace of mind in the event of a rainy day.