What Is Business Interruption Insurance?

Business interruption insurance can help you make up for lost business income and cover expenses like taxes and payroll when your small business is physically unable to operate as usual after an accident or disaster.

It’s one of those special types of business insurance coverage, like flood insurance, that may seem unnecessary. However, once disaster hits and you see the true value of having coverage, it’s too late to buy it. The time to evaluate your needs and decide on your coverage is now.

Businesses with up to $5 million in annual revenue and up to 100 employees are eligible for business interruption insurance. If you fall within those limits, we recommend meeting with your choice of the best business insurance providers to discuss business interruption insurance. This guide to business interruption insurance will outline your options so you’ll be ready to choose the right coverage for your small business.

What Is Business Interruption Insurance?

Business interruption insurance is a specialty policy or endorsement that supports your small business during a temporary closure following a fire, an act of vandalism, or another type of disaster. Business interruption insurance often is bundled with other types of coverage into a business owner’s policy.

Business interruption insurance works alongside your commercial property insurance. The two types of policies offer very different types of coverage, however.

Your property insurance protects your physical building, equipment, inventory, and other property. Business interruption insurance differs from even the best standalone commercial property insurance policy by protecting the financial aspects of your business. For this reason, business interruption insurance is also known as business income insurance.

How Does Business Interruption Insurance Work?

If you have to shutter your business due to physical damages from a disaster or accident, business interruption insurance will replace lost income and reimburse you for related business expenses. That can include not just making up lost income and reimbursement for extra expenses but also paying for normal operating expenses like payroll, taxes, and loan payments while you’re unable to bring in your normal income.

To claim business interruption, your business must be closed due to physical damage following a covered event. Of course, business interruption insurance doesn’t cover everything. Here’s a rundown of what typically is and isn’t covered.

Who Needs Business Interruption Insurance?

Now that you understand what business interruption insurance is and how it works, it’s time to decide if you need this type of coverage.

Your business is eligible if you have up to 100 employees and revenue up to $5 million.

If you have a physical storefront or location, if you rely on manufactured goods or supplies from one or more distributors, and if you would have a hard time staying open for business if your physical workplace was inaccessible, you should consider investing in business interruption insurance.

Remember that commercial property insurance only covers physical property damage. It does not reimburse you for financial losses. Without the additional protections business interruption insurance delivers, a temporary or long-lasting closure of your business could be financially disastrous.

How Much Does Business Interruption Insurance Cost?

Business interruption insurance is an add-on endorsement to your commercial property insurance or business owner’s policy. You cannot buy business interruption insurance as a standalone policy. Data show that adding business interruption insurance to your commercial property or business owner’s policy typically costs an additional $500-$1,500/year.

To control your insurance costs, make sure you’re getting the right amount of coverage. In general, your coverage is determined by profit. How much your business needs will depend on your answers to questions like these:

• How easily can you work from a temporary location?
• How long will your business be closed?
• How many employees do you have?
• How much income will you insure and how much?
• Is your current location a fire risk or in possession of an updated sprinkler system?
• Are you located in an area where you could find another retail space easily?

If your business is located in an area with a high risk for a natural disaster (such as hurricanes, tornadoes, or wildfires), your coverage might need to include entire seasons where you are at risk. If your business is easy to move, doesn’t rely on outside manufacturing, and has only a handful of employees, you will need less coverage. You can feel confident that you’re getting the right coverage if your plan fully covers loss of income and payroll expenses, your projected gross income, and your projected net income. 

Business interruption policies are very specific on their limit terms: Your policy will itemize everything it will/will not pay for and up to what limits. Your insurance team is responsible for walking you through the itemization. Remember that you’ll have to document your income and update your policy if your income or expenses change significantly to ensure your coverage limits are up to date.

Understanding some of the terminology used when discussing business interruption insurance will help you make the right choices. Here are a few terms and phrases you should understand.

The Bottom Line On Business Interruption Insurance

Ask yourself: What would happen if you had to close your doors because a tree fell on your roof, a flood wiped away the road to your business’s front door, or a fire destroyed all your inventory? If you have the right coverage from one of the best business insurance providers, business interruption insurance helps you answer those questions and recover more quickly.

Other types of commercial coverage, like property insurance, can help by paying to replace the lost inventory or the damaged roof. But if your business can’t operate and bring in revenue, you won’t be able to make payroll, pay your rent and taxes, or make up for those lost sales.

Unless you’re prepared to handle those expenses on your own, with no income, you should talk to your professional insurance representative about adding business interruption insurance.