Business interruption insurance premiums are tax-deductible as ordinary business expenses. This type of policy pays out only if the cause of the business income loss is covered in the underlying property/casualty policy. The amount payable is usually based on the past financial records of the business.
Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy. According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days.
What is business interruption insurance?
Business interruption insurance is designed to replace a source of business revenue that’s suddenly reduced or eliminated by certain disruptive events. This coverage can also extend to additional expenses that help you limit your loss and get back to business quickly after the incident.
Business interruption insurance helps to replace lost business income if you are unable to open your business on a temporary basis due to a loss covered by the policy, such as a fire or theft.
This insurance coverage type is sometimes called “business income coverage.” It’s typically included as part of a business owners policy (BOP).
When work grinds to a halt, you not only have to put time and money toward getting your business back on track, but your potential income stream could dry up, too. It’s a double hit to your bottom line that many businesses simply can’t afford. That’s why we have specialized coverage to help get you through a break in business.
Business interruption insurance is a type of property coverage, but instead of directly covering the costs of repair or replacement, it covers the indirect costs of property damage – the loss of income you would have made if your business was to continue operating as usual. And just like a commercial property insurance policy, your business interruption policy will outline what kinds of perils are covered and when it can be used.
Key Takeaways
- Business interruption insurance is insurance coverage that replaces income lost in the event that business is halted due to direct physical loss or damage, such as might be caused by a fire or a natural disaster.
- This type of insurance also covers operating expenses, a move to a temporary location if necessary, payroll, taxes, and loan payments.
- In rare cases, business interruption insurance can apply if a civil authority shuts down a business due to physical damage to a nearby business, resulting in a loss for a firm.
- Standard business interruption insurance does not reimburse policy holders if the business is closed due to a pandemic. Even some all-risk insurance plans have specific exclusions for losses due to viruses or bacteria.
What kind of coverage is right?
The base business interruption insurance is known as business income coverage, but there are other types of coverage, too. The best type of business interruption insurance for your business will depend on a few factors.
Not sure what to consider? No need to worry – these are details your insurance broker will be able to help you navigate when building out your policy.
What Does Business Interruption Insurance Cover?
Business interruption insurance covers the operating expenses for a business due to a problem covered by the policy. The covered perils for business interruption insurance are generally theft, wind, fire, lightning and falling objects.
Covered operating expenses may include:
- The revenue your business would make if it were open for business
- Monthly mortgage, lease and rent payments for the business space
- Loan payments for the business
- Taxes
- Payroll
- Relocation costs if you have to move to a temporary location
- Training costs for employees to learn new equipment
What Does Business Interruption Insurance Not Cover?
There are plenty of exclusions to a business interruption insurance policy, such as:
- Damage from a flood or earthquake. Both require separate insurance policies.
- Undocumented income that’s not listed in your financial records.
- Utilities, because they are usually shut off when a business is under repair.
- Closure caused by communicable diseases.
- Damaged property, which would be covered under commercial property insurance.
Who Needs Business Interruption Insurance?
Every business needs money to pay for expenses – from employee wages to equipment maintenance to workspace rental costs – so every business needs a backup plan. Whether your company is big or small, for-profit or not-for-profit, you need business interruption insurance.
While business interruption insurance is a good option for most small business owners, it can be a crucial coverage type for businesses that rely on a physical location (like your building) or assets (like machinery or equipment) that could be affected by problems, such as fire, theft, wind, lighting and falling objects.
This includes businesses, such as:
- Restaurants
- Retail stores
- Salons & spas
- Dog groomers
- Yoga studios
How Much Business Interruption Insurance Coverage Do I Need?
Every business interruption policy generally has a coverage limit. This is the maximum amount your insurance company will pay toward a business interruption claim. Choosing a good coverage amount is essential because you’ll have to absorb any financial losses above your coverage limit.
Consider these factors:
- How long would it take to get the business up and running after a disastrous problem like a fire?
- Are the security and fire alarms for your business up to date?
- How much would it cost to rent new office space in your area, and is space readily available?
Look at your gross earnings and earnings projections as guidelines for the right amount of coverage. You want the insurance to cover the costs of operating expenses while repairs are being made to the business.
How Much Does Business Interruption Insurance Cost?
The cost for a business interruption insurance policy is based on a variety of factors such as your industry, the number of employees and the amount of coverage that you choose.
A business interruption insurance policy costs between $40 and $130 per month, or $480 and $1,560 per year, according to Insureon.
Costs can also vary based on your business location and your risk of making a claim.
How Long Does Business Interruption Insurance Coverage Last?
In most cases, there is a 48- to 72-hour waiting period for a business interruption policy to kick after a loss that’s covered by insurance. Look at your policy’s “restoration period,” which is the length of time the policy will pay for covered losses.
A restoration period usually lasts up to 12 months. So if your business was damaged on April 1, you would be entitled to business interruption benefits until April 1 of the following year. The restoration period begins with 30 days and then gets extended as needed up to a year.
Location
If you were to suffer a disruptive loss, would you be able to set up at another location fairly easily to keep operating? A real estate agency or accounting firm that could work out of another office may only need coverage for expenses involved in relocating to that new spot. On the other hand, if your work depends wholly on your current location – a large manufacturing plant, for instance – you probably need coverage that extends to lost income as well, since you won’t be able to resume your operations without a substantial set-up phase.
How can business interruption coverage help?
Basic business interruption insurance can save your business from a number of disruptive situations, like floods or vandalism, and there are extensions to help you out in more specific circumstances, too.
A fire has gutted your building
Fire is a common risk for businesses, especially when you use heat, flame, or combustible products in your operations. And fire has a reputation for destruction: it doesn’t take long for a small flame to grow into a devastating blaze that wipes out the crucial equipment and products your operations depend upon.
A big fire can eat up a lot of time and potential income, considering a major clean up and restoration can take weeks or months. Business interruption insurance can help cover that lost revenue and keep your business solvent during your recovery phase.
You’ve lost a key employee
Whether you run a small business or oversee a big operation, some colleagues are indispensable. These are the employees you count on to keep things running smoothly and successfully, and when they’re not around, you notice it.
Human resources are as important as physical assets, and if a key employee were to suffer a permanent disability, your business could stall. Replacing such an important person can bring training, advertising, and payroll expenses; the right business interruption coverage can offer welcome support after a covered accident takes out a key player in your operation.
An important partner suffered a setback
In some cases, an interruption to your business is traced to a problem with an associated property or product, not your own workspace. This is when contingent business interruption coverage can come into play: it covers loss of earnings resulting from an insured peril that damages or destroys another property or product that your operations count on.
For instance, a natural catastrophe like a flood or earthquake could sideline a crucial supplier of yours, which means you can’t produce your product until they get back to business. Natural disasters aren’t the only triggers: things like fire or train derailment can also seriously impact your supply chain or another consumer product that your business relies upon, and you may need contingent business interruption coverage to recover from the setback.
What’s the period of indemnity?
In any of the scenarios above, you’ll need to consider your period of indemnity: basic business interruption coverage usually allots 12 months of compensation, but that may not be enough for your operation to fully recover. This is a particularly pertinent concern for manufacturers.
For instance, it may only take you six months to restore your property, but when you reopen you’re not operating at the same level as you were before the loss.
In some cases, it takes a lot longer to restore your revenue stream to its former glory, and you may need to shell out extra costs (think public relations and advertising) in the meantime to summon your customers back to your business.
In this case, you’d want an extended period of indemnity – an endorsement to your policy that can help cover those expenses that aren’t generally included under a basic policy. Fortunately, this is something your broker can help you with.
Are you managing your risk?
Risk is a part of business – risk management should be, too. It can be challenging to make space for risk mitigation in your daily routine, but this is a corner that shouldn’t be cut. After all, even if you have the right insurance coverage, preventing a loss is always better than recovering from one.
Risk management solutions can be as simple as improving the layout of your workspace, or as involved as launching a company-wide training program.
