What is business interruption insurance?
Business interruption insurance (also known as business income insurance) covers the profit loss that your business may suffer after a disaster. Such disasters may include natural disasters, sabotage, strikes and others. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster. Typically this insurance is not provided alone, but can be added to your commercial property insurance or is bundled with a business owner’s policy.
Business interruption insurance is critical for businesses that rely on physical assets to run their business. Naturally, this includes any business with a physical location (stores, restaurants, offices, warehouses, etc.).
This can also include any business that has invested in a business vehicle or significant amounts of equipment. If you are a carpenter that travels to sites in a customized trailer that has tens of thousands of dollars of vital equipment, the theft of that trailer would make your business grind to a halt for a significant period of time, while you replace all of your tools and supplies.
There is often confusion between business interruption insurance and commercial property insurance. The difference between the two is that property insurance compensates you for damages and physical losses, while business interruption insurance compensates you for lost income from work frozen by a disaster.
Business interruption insurance typically covers three things:
- Lost Profit: the loss or reduction of net income during the recovery period, up to the limit of your insurance policy.
- Normal Operating or Fixed Expenses: including rent, employee’s wages (so you can maintain your staff during the interruption), utilities (depending on the circumstances), loan payments and taxes.
- Moving Expenses: if your business moves to a new location, either temporarily or permanently, this will include the cost of moving and, in the case of a temporary relocation, rental costs.
Most policies will cover these costs throughout what is called the “period of restoration.” This period is defined as the length of time required to rebuild, repair or replace the damaged or destroyed property, or relocate into a new location and reopen the business (whichever is shorter, typically).
What’s not covered?
Like all insurance policies, there are things that are not covered by business interruption insurance. As mentioned above, this type of policy is often confused with business or commercial property insurance. Commercial property insurance covers the physical losses, while business interruption insurance does not.
Let’s clarify with an example. You’re a carpenter with a customized trailer that carries all of your tools and supplies and one night, your trailer is broken into and looted. Your tools are gone and you can’t work until everything is replaced. Some of the tools are custom and will take six weeks to be delivered. Business interruption insurance will compensate you for the six weeks that your business cannot operate, but not for the actual cost of the tools. The tools themselves are only covered by commercial property insurance or commercial crime insurance.
Other things that are not covered by business interruption insurance are reductions in business profits due to economic slump, poor company management or increased competition.
While business interruption insurance does protect you when business is shut down due to damage by a natural disaster, temporary business closure by a weather event such a snow or heavy rain that does not cause property damage is typically NOT covered.
Additional Coverage Options
What’s been discussed so far is your average, standard business interruption insurance. Of course, you can purchase additional types of coverage, though they will naturally add to your premium.
Extended Business Income Coverage
This optional coverage can protect your business from profit loss due to a slow return to pre-loss sales levels after the business has reopened. This protection only last during the period of restoration. Restoration can take time, as customers may not realize the business has reopened or it may take time for them to regain confidence it a business that was closed for a significant period.
Expiration of the policy does not end the period of restoration, so long as the damage to the property occurred when the policy was active. But once the business is operating at pre-closure levels, the coverage stops.
This coverage protects you against business stoppage due to damage to utility lines that service your business, including (but not limited to) electrical, gas, water and sewers. If damage to any of these utilities forces you to close your business or impairs your operations, you can make a claim under service interruption coverage.
Some limitations in this coverage may include the distance from your business that the damage occurred, certain causes as defined in the policy (such as earthquakes) or overhead lines that aren’t covered due to their exposure.
Contingent Business Interruption
This coverage is designed to protect your business from loss of income due to damage to suppliers to your business or receivers of your manufactured goods. If the property damage is of the type covered by your policy, you would be protected under contingent business interruption insurance.
This coverage protects you from business income loss due to damage to an adjacent business that draws customers to your business. If a business within the stated distance from your business suffers damage of the type that is defined in your policy and it affects your business, you will be covered by leader property insurance.
Interruption by Civil Authority
In the event the government or military restricts access to your business for public safety or other reasons, for example due to flooding or wildfires in surrounding areas, your business will be compensated by this coverage. Typically the coverage time period is limited to either 14 or 30 consecutive days, as designated in the terms of your policy.
To Keep in Mind...
There are some additional conditions to keep in mind when signing up for a policy.
Business interruption insurance is usually subject to a waiting period. This means that your coverage and compensation will not start at the time of the damage to your business, but some period of time after. Typically the waiting period is 72 hours. No business or profit loses will be covered during the waiting period.
Proof of Loss
In order to get coverage, you must prove that your business is suffering financial loss from damage. This can be tricky, so be sure to carefully check your policy and understand what is required and what is accepted as proof of loss. Always document your daily operations so that, in the event of a loss, your insurer has a point of reference.
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