What would you do if your business was interrupted by a natural disaster or some other type of emergency? Or, in the case of a lightning strike frying all of the essential equipment needed to operate, your business had to close its doors for an extended period of time? What then? If you don’t have business interruption insurance coverage, you could be out of luck. This is why it’s critical for business owners to take out a business income coverage policy.
What is Business Interruption Insurance?
Business income insurance, commonly referred to as business interruption insurance, is a crucial type of business insurance that helps safeguard your business against significant financial losses due to interruptions or closures. It provides protection to entrepreneurs from lost income and other associated expenses when a covered event, such as a fire or falling objects, disrupts operations.
The time that the insured company is shut down and repaired is what is known as the restoration period. This period typically has a time restriction, which is usually 30 days. Fortunately, business owners can often extend the restoration period included in their policy for an additional cost.
Why You Should Take Out a Business Income Coverage Policy
No one knows when an emergency will happen, but that doesn’t mean businesses shouldn’t be prepared. If something does go wrong and your business is forced to close, you could lose a lot of money. This problem is especially true for small businesses, which often don’t have the same financial cushion as their larger counterparts.
The business insurance benefits that this type of insurance brings can help you:
- Replace lost income: If your business must close, this policy will assist in replacing the net income you would have earned had you been operating normally.
- Cover additional expenses: If you need to move your business due to a covered emergency, this policy will assist in covering the additional costs that arise from the relocation.
- Cover the cost of moving to a new or temporary location: If you have to temporarily or permanently relocate your business due to a covered event, this policy can help pay for the costs associated with doing so.
- Pay for additional expenses related to the interruption: Business interruption coverage can also help pay for things like the loss of business records and temporary employee costs.
- Training costs: Business interruption insurance can help pay for the training cost for personnel to learn how to operate new equipment.
Bear in mind the lost net income amount of a business an insurance company considers is based on its financial records. Your insurance company will likely ask you to provide P&L statements, sales records, payroll records, tax returns and any other information that declares your income and expenses.
What Expenses are Covered by Business Income Coverage?
The loss of business income and the operating expenses that result from a covered emergency are what business income coverage is designed to cover. But it’s important to note that not all expenses related to your interrupted business operations are covered by this type of policy.
Policies can differ, but some common examples of operating expenses covered by this kind of insurance include:
- Expenses used for temporary or permanent relocation.
- Wages for temporary employees.
- Loss of business records.
- Extra expenses to keep the business running.
- Taxes and routine bills.
- Payroll expense.
- Mortgage, lease and loan payments.
What Does Business Interruption Insurance Cover?
Covered natural or manufactured disasters largely depend on the policy’s terms, but they generally include damage from:
Fire
A fire can quickly destroy a business’s property, equipment and inventory. This disaster could leave the building uninhabitable and damage or destroy goods just before they were scheduled to ship to customers. Business income insurance coverage can assist with the loss of business income due to the slowdown or temporary closure of the business. In addition, if the business needs to move because of a fire, the coverage can also help with the cost of the move.
Wind
High winds can knock down trees or power lines, causing extensive damage to your business property. Often, business interruption insurance works together with commercial property insurance to pay for repairs. For instance, the insurance for the commercial property could pay for roof repairs. In contrast, business interruption insurance can help you recoup any lost income resulting from the business closure due to the wind severely damaging the roof.
Falling objects
If an unexpected event affects your business, such as a falling tree, hail, boulder, or debris from another building, business interruption insurance can compensate for the loss of income while you make repairs and reopen. However, if the incident involves someone else’s equipment, a portion of a building, vehicle, or aircraft impacting your property, the general liability insurance of the responsible party will cover the legal costs and damages, which may also include compensation for lost income during the shutdown.
Lightning
A lightning strike can inflict physical damage to a business owner’s property in various ways. Firstly, it may ignite a fire at your establishment or damage your electrical wiring. Secondly, it can harm essential equipment. While property insurance can assist with the repair or replacement of damaged assets, business interruption insurance can help cover your lost income if you need to close or relocate due to lightning-related damage.
Theft
The type of insurance coverage that applies to theft will depend on whether the person works for you or not. If they don’t work for you and their thievery affects your business, then business interruption insurance can help cover the costs. If an employee commits fraud or theft, then fidelity bonds protect the company from financial losses. A Business Owners Policy (also known as a BOP) covers physical damage to the property and its contents during the commission of crimes like theft and robbery.
Civil unrest
Civil unrest is considered a covered event if you are forced to halt operations or limit hours due to it. Business income insurance will help you recover lost income in these circumstances. Therefore, if there’s a riot, looting, vandalism or other types of civil unrest in your area that causes a shutdown, this type of policy could reimburse you.
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What’s Not Covered by Business Interruption Insurance
There are circumstances that insurance for business interruptions generally won’t cover. For example, business interruption coverage doesn’t pay for broken items or damaged assets that result from a covered event (commercial property insurance policies usually cover this); flood or earthquake physical damage, which is covered by a separate policy; undocumented income that isn’t listed on your company’s financial records.
In addition, the coverage doesn’t pay for the following:
- Losses caused by terrorism or war.
- Economic loss when a communicable disease causes business interruptions or closures.
- Utility services that are usually shut off when a business is under repair.
- In cases where the civil authority clause is used. This happens when a civil authority, such as a local state or federal governmental entity evacuates or prohibits access to an area after a natural disaster occurs. In these cases, civil authority coverage takes precedence over business income insurance, and the clause will outline whether or not the government will reimburse you for your lost income.
- Workers’ compensation. You will need to purchase workers’ compensation insurance separate from interruption insurance for employees injured on the business premises or working for you off-premise.
Does Business Interruption Insurance Cover Covid-19 Shutdowns?
It’s a hotly debated topic, but the insurance industry’s stance is that there is generally no coverage for pandemics. However, that fact hasn’t stopped firms who think their losses should be covered and are pursuing lawsuits against insurance companies. Still, there are insurance companies that cover businesses affected by the coronavirus.
Check the wording of your policy to see if it a pandemic is explicitly excluded or included. You can also talk to someone at your insurance company to see if they can include this type of coverage.
How Much Does Business Interruption Insurance Cost?
So, how much does business insurance cost? Prices for business interruption insurance vary, depending on factors, such as:
- The size of your company.
- Type of industry.
- Number of employees.
- How much coverage you need.
- Your deductible.
- The location of your business.
- Value of your inventory.
- How often you file claims.
- Whether you have other policies with the same insurer.
The businesses’ gross earnings are also a factor that insurers will consider when setting rates. As a general rule, the higher the gross earnings, the more coverage you’ll need. Your policy should have enough coverage to replace all of your lost income, as well as your ongoing expenses.
Insureon provides a helpful benchmark for what you can anticipate when seeking a quote for this type of business insurance. According to the small business insurer, a business owner can expect to pay between $40 and $130 per month, or $480 to $1,560 per year for the policy. If you are uncertain about the amount of coverage you require, it is advisable to consult with an insurance agent.
How to Choose the Best Small Business Interruption Coverage
As you can see, it’s essential to get the best business interruption coverage for your needs and to help your business recover—there is simply too much at stake to leave things to chance.
Here are some factors to consider when choosing the best coverage from your insurance company:
- Your business interruption insurance should cover your business’s gross earnings. This will help you to be able to continue making a profit after an unexpected event. An insurance agent can help you calculate your business income for insurance.
- Ensure you have adequate coverage and the appropriate type of coverage to restore your business in the event of damage.
- Consider adding extra expense coverage for property damage and loss of income.
- If your business operates mainly online or relies heavily on computers, consider whether you need coverage from a casualty insurance company instead of just having business interruption insurance, or if you require both types of coverage. A casualty insurance company can offer the appropriate insurance to protect you against cybercrime, website damage, and other related liabilities.
Also, it’s a good idea to find out the following:
- Does the insurance company you are considering offer the best rates and service?
- Does your insurance company bundle the different business insurance coverages you need to cover losses?
- Does the insurance company pay claims quickly, or are there long wait times?
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How to Get Business Income Insurance
The following steps outline how a business owner should go about getting their business income insurance policy:
1. Consult with a business attorney: There are many gray areas when it comes to business interruption insurance. A business attorney can help you understand your policy language and help you understand if any extra expense or certain event is covered.
2. Consult with your accountant about insurance options: Accountants can assist you in comprehending the financial implications of a business interruption and determine the appropriate level of coverage needed to safeguard your business.
3. Talk with your peers and compare: As a business owner, it’s important to get an idea of what other small business owners are paying for similar coverage, especially if they conduct business in the same area where your business is located.
4. Meet with insurance agents: A reputable, licensed insurance agent can help you find the best policy for your business and ensure that you are fully protected in the event of a business interruption.
5. Do your research: Understand the ins and outs of all business insurance policies. Then, compare rates from several insurance companies before making a decision.
6. Bundle your policies: You can talk to your insurance company about bundling different business insurance policies together to save money. For instance, a standard business interruption policy can be bundled with a property insurance policy. Or both of those policies and others can be bundled as part of a business owner’s policy (BOP).
7. Assess risk: Evaluate all the risk factors associated with your business and compare them to your coverage limit. If the potential for a disaster is significant and your current coverage limit is insufficient, you may need to acquire additional coverage. For instance, if your business is located in a flood-prone area, it might be necessary to obtain extra flood coverage.
8. Reassess every year: Review your policy annually to ensure that you have the best protection in place for your business.
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This article, “What You Need to Know About Business Interruption Insurance” was first published on Small Business Trends
