Business interruption insurance, also known as business income insurance, is an important type of insurance coverage that helps protect businesses financially when they suffer disruptions to their normal operations.
This type of insurance provides coverage for lost income and expenses in the event your business has to suspend operations or limit services temporarily due to direct physical loss or damage from a covered event.
Having business interruption insurance can be a critical lifeline for many small businesses that may not have enough cash reserves to withstand an extended closure or disruption. This post will provide an overview of what business interruption insurance is, who needs it, what it covers, how it works, and tips for buying the right policy.
What is Business Interruption Insurance?
Business interruption insurance provides coverage for loss of income that a business suffers during a period of restoration after an insured event. The insured event must involve direct physical loss or damage to insured property and must be covered under the business’ property insurance policy.
Common examples of covered events include:
- Fire, smoke, or wind damage
- Vandalism or theft
- Equipment breakdowns or power outages
- Natural disasters like floods, hurricanes, or tornadoes
- Civil unrest
The goal of business interruption insurance is to put the business back in the financial position it would have been in had the loss not occurred. It covers continuing fixed operating expenses and lost net income until the business can resume normal operations.
Who Needs Business Interruption Insurance?
Business interruption insurance is recommended for most small businesses, but is especially important for businesses that:
- Rely heavily on in-person customer traffic
- Have significant ongoing operating expenses and payroll
- Have a physical commercial location or building
- Would suffer major financial hardship from an extended closure
- Operate in hurricane, flood, or other disaster-prone regions
Examples of businesses that need business interruption insurance include:
- Retail stores and restaurants
- Hotels, theaters, and event spaces
- Manufacturing facilities and industrial plants
- Professional service firms like law, accounting, real estate
- Healthcare clinics, dental practices, veterinary hospitals
Even home-based and online businesses can benefit from business interruption coverage for their lost net income if they had property damage that suspended business activities.
What Does Business Interruption Insurance Cover?
Business interruption insurance provides compensation for lost income and expenses directly resulting from physical loss or damage to insured property that interrupts normal business operations. Here are some of the major costs covered:
- Lost Business Income
This covers your actual lost net income, calculated as net profits plus continuing normal operating expenses like payroll, taxes, utilities, loan payments etc. Most policies cover lost income for 12 months after the loss.
- Fixed Operating Expenses
Even if business is halted, you likely still have ongoing fixed costs you must pay like rent, lease payments, utility bills, insurance premiums, taxes, scheduled loan payments, salaries, and more. These fixed operating expenses are covered up to the policy limit.
- Extra Expense
This covers the reasonable extra costs of operating your business during the period of interruption, over and above your fixed operating expenses. Examples include expenses to rent temporary space, hire labor for clean up, work overtime to catch up, rent temporary equipment, etc.
- Extended Business Interruption
Some policies will cover losses that continue after damage is repaired if your operations are still impacted by the effects of suppliers, customers or other third-parties also recovering from the same insured event. This includes loss of attraction coverage.
- Contingent Business Interruption
This optional extension covers lost income and extra expenses resulting when an insured loss damages or interrupts operations of your key suppliers, customers, or other critical business partners, in turn impacting your business.
How Does Business Interruption Insurance Work?
Here is an overview of how business interruption insurance provides coverage in the event of an insured loss:
- A covered event causes physical damage to your insured property. For example, a fire burns down your office, or a tornado rips the roof off your manufacturing facility.
- Your operations are interrupted or limited while property is repaired or replaced. You have to close your doors or halt production during the period of restoration.
- You submit a claim documenting your lost business income and expenses. This is typically calculated starting 72 hours after the loss, known as the waiting period, and continues for the next 12 months or until you resume normal operations, whichever comes first.
- The insurer compensates you up to the policy limits. You receive payment to help cover your lost profits plus normal operating expenses incurred during the interruption. Extra expenses may also be reimbursed.
- Business resumes as normal. Once repairs are completed and operations can fully resume, business interruption coverage ends. You regain your revenue stream back to normal levels.
What is the Business Interruption Insurance Claims Process?
The exact claims process can vary slightly by insurer and policy. But in general, here are the key steps to secure coverage after an insured loss:
- Report the Loss Promptly: Notify your insurer as soon as possible after your property suffers direct physical damage. Provide details, dates, and documentation.
- Document Your Losses: Gather all financial statements, accounting records, invoices, and other documentation that can quantify the extent of your lost income and extra expenses resulting from the disruption.
- Prove Your Loss is Covered: You must demonstrate that the physical damage is covered, the resulting suspension of operations was necessary, and your claimed business income loss is directly attributable to the interruption.
- Submit Your Business Interruption Claim: Work closely with your insurer’s claims adjuster to prepare, file, and negotiate your claim seeking reimbursement for covered income, expenses, and extra costs.
- Receive Your Benefits: If approved, you will receive payment to help your business recover financially from the disruption, up the limits of your policy.
Tips for Buying the Right Business Interruption Insurance
Follow these tips when shopping for the right business interruption coverage:
- Assess your risks: Consider potential threats of property damage and business disruption based on your industry, location, building, equipment etc.
- Buy enough coverage: Insure for at least your annual net income plus 12 months projected expenses. Also get extra expense coverage.
- Mind the limits: Pay attention to caps on coverage for closures prompted by civil authorities, customers/suppliers, or lack of access to your premises.
- Consider extensions: For added protection, get extended BI and contingent BI coverage for losses propagating through your supply chain.
- Review exclusions: Understand any excluded causes of loss not covered that could impact your operations.
- Insure for peak season: If your income fluctuates, insure based on your maximum income months.
- Coordinate with property insurance: Make sure both policies sync up to provide seamless protection.
- Work with an agent: An experienced independent insurance agent can help craft the right custom policy.
Business interruption insurance provides vital protection that can literally make or break a small business. Trying to recover after a disaster, accident or other insured loss that halts normal operations.
With the right business interruption coverage, small businesses can have added peace of mind. Knowing they have a financial safety net when the unexpected occurs.