What Is Business Interruption Insurance?

If your business shuts down or limits operations due to a covered event, business interruption insurance helps cover the following:

• Lost Net Income: Your estimated lost profits during a covered event that keeps you from operating as usual will be based on prior months’ performance.
• Rent Or Lease Payments: If you have business interruption insurance, you won’t need to worry about losing your physical location because of non-payment.
• Fixed Costs: Your operating expenses, payroll, and other costs of doing business can be covered by business interruption insurance.
• Relocation Costs: If you need to move operations temporarily to a new location, your business interruption insurance will cover the costs of that move. This can include moving fees and installation and setup fees for tech and equipment.
• Taxes: If you make quarterly tax payments or pay property taxes on a location you can’t access, business interruption insurance will help you make those payments.
• Loan Payments: Business interruption insurance can help you make your regularly scheduled business loan payments, even if you’re unable to operate and generate the income you need.
• Civil Authority Coverage: If a covered natural disaster event causes widespread damage in your area, you may lose access to your place of business even if your location itself escapes damage. For example, police may close access roads following a tornado. Even though your business is undamaged, you’ll still be unable to operate as usual.

Your business interruption insurance policy will list very specific covered and non-covered events. While each policy will be different, the following types of losses and risks typically are not covered by business interruption insurance:

• Property Damage: Business interruption insurance doesn’t reimburse you for damage to your buildings, equipment, or inventory. You need commercial property insurance to cover those losses. Check out our recommendations for the best commercial property insurance to make sure you have the right coverage.
• Undocumented Income: Outdated records may hurt you. If you awarded raises, saw a big jump in revenue, or hired new employees since you started your policy, your coverage won’t be enough. Be sure to update your insurance regularly.
• Non-Covered Events: Check your policy for exclusions. Some events, like floods, earthquakes, and hurricanes, can be covered with a separate but common policy. Others, like communicable diseases or pandemics, can be included only with a very specific policy called contingent business interruption coverage.
• Economic Slumps: If downturns or other shifts in the economy cause you to shut down your business, that won’t be covered since that wouldn’t count as a loss resulting from property damage. Additionally, if revenue lags once your business reopens after repairs, that lost income is not a covered loss. For that, you’d need a type of coverage known as extended business interruption.
• Power Outages: A power outage is not covered under business interruption insurance, no matter the cause. This type of temporary interruption is too ubiquitous to cover effectively. Some types of power loss can be covered by a special policy, such as a temperature change policy for restaurants.

Before you can make decisions about what kind of coverage you need, you’ll need to understand what the policy means. Here are some common phrases you see when you look at a business interruption insurance plan:

• Actual Loss: The policy will only cover damage related to the disaster. If you choose to renovate beyond the price of the actual damage, the insurance company will not cover updates.
• Business Income: This is your net income. Lost net income will be the sum of your lost profits and disaster-related expenses.
• Period Of Restoration: This is the time that you might need to get your business back up and running again. Your policy will include a specific amount of time for rebuilding/restoration.
• Extra Expenses: These are the expenses that occur because of the disaster, such as a rental truck or rent on a temporary facility.
• Service Interruption: This coverage directly relates to your utilities. You can’t insure specific companies, nor can you insure against service disruption because of earthquakes.
• Contingent Business Interruption: This helps you if your business depends (“is contingent”) on other businesses. If another company suffers a loss that affects your bottom line, this policy would protect you against those losses.
• Leader Property: If your business derives its foot traffic from a more profitable and well-known store, that store is called a leader property; if the leader property suffers a loss that affects your store, you may be protected from those income losses.

Business interruption insurance protects you from financial losses that will occur if your business operations are halted or altered as a result of property damage caused by natural disasters, accidents, or vandalism. This insurance covers key expenses such as your business’s income, payroll, rent, and taxes when your business is unable to operate temporarily following a covered event. If your business doesn’t have the financial resources to stay afloat while you’re unable to make sales and bring in income, business interruption insurance is worth the price.

Business interruption insurance is a good idea for any small business that would take a while to recover after a physical loss or damage to your physical location that keeps you from operating normally and making sales. However, only businesses with 100 or fewer employees and up to $5 million in annual sales are eligible for this type of insurance.

Business interruption insurance is a type of insurance policy that provides policyholders with financial protections after their businesses are forced to close due to direct physical losses. Examples include a tree falling on your roof, a fire, or wind damage that blocks roads going to your store. Your business property insurance will help you replace and repair damaged equipment and inventory, while business interruption insurance helps you recover lost income and certain expenses related to the closure.

Factors that determine how much business interruption insurance you need are your net and gross incomes, your payroll, risks associated with your business’s locale, and how long you may need to operate from a temporary location.