What Is Business Interruption Insurance & Do You Need It? — Coronavirus Edition
There are many risks to running a business. One of the worries a business owner might have is, What would happen if I had to close the business for a time due to an accident or disaster?
Do you have a plan to deal with a loss of income or pay for utilities that aren’t working? What if you have to relocate temporarily? All of those scenarios cost money, possibly money you’re not earning. With a business interruption insurance endorsement, you don’t have to let a temporary closure result in a full closure or bankruptcy. If your business needs time to heal after a fire, a tornado, hurricane, or even an act of vandalism, this insurance provides the coverage you’ll need to keep moving forward.
Read on to learn more about business interruption insurance, including exactly what it covers, how to buy it, and more. Looking for more resources about surviving the coronavirus pandemic? Check out our COVID-19 hub for small businesses.
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What Is Business Interruption Insurance?
If you have to shut your business for any amount of time due to a disaster or accident, business interruption insurance, or business income insurance, will protect the income you might lose and help you move to another location so that you can open your doors quickly. While your property insurance might cover the physical damage of a fire or hurricane, it does not cover financial business losses. Business interruption insurance is limited to either your business’s projected gross income or your net profits.
You may be under-insured if you don’t include interruption coverage in your contract. (Business interruption coverage is an endorsement added to a commercial property policy, or it can be part of a Business Owners Policy. For more information on those types of policies, visit our article on the types of insurance you might need.)
What Business Interruption Insurance Covers
You can’t buy business interruption insurance by itself, so all businesses will need to bundle their business interruption endorsement with a commercial property policy. However, if you add a business interruption endorsement to your risk management plan, be aware that the policy will cover only specific aspects of your business.
- Loss Of Profit/Income: If you have to close your business because of a covered disaster or accident, any lost profits or income up to a certain amount are covered in your plan. This can be a huge relief to someone in, say, a hurricane zone where a storefront might experience temporary or long-term closing.
- Relocation: If your business is ravaged by fire or destroyed by a windstorm and you find yourself needing to move to a new location to operate, your business interruption insurance will cover the costs of that move (including moving fees and installation and setup fees of tech and equipment).
- Operating Expenses: This will protect the bills you’ll need to continue paying even though your doors are closed. Employee wages are included under operating expenses, as is your rent or lease payments.
- Paying Your Taxes: If you owe taxes or are paying property taxes on a location that you can’t access, business interruption insurance will help.
What Business Interruption Insurance Doesn’t Cover
As with most policies, each company and policy will itemize exactly what is and isn’t covered. Business interruption insurance is very specific and often will state within the paperwork covered and non-covered events. While each policy is different, for most business interruption insurance policies, some specific losses and risks are not covered.
- Undocumented Income: Outdated records may hurt you. If you gave raises or have brought on new employees since you started your policy, your coverage won’t be enough. If you make any updates to employment, update your insurance as well.
- Partial Closures: Only closed part-time? Business interruption insurance only becomes available once your business is completely closed. If you are still able to maintain some of your business services, then you cannot start a claim for business interruption.
- Losses From Non-Covered Damages: If your property insurance covers floods, your business interruption will cover floods too. If it doesn’t? Then your business interruption may not cover losses.
- Economic Slumps: Unfortunately, there’s no way to make your business recession-proof.
- Coverage From 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 policies set an amount of time that the power must be down to receive help.)
We wish we would give you a blanket answer that says, “Yes, your insurance will cover some of your losses from this pandemic!” However, each insurance policy has different terms and coverage policies, and most business interruption policies are triggered in the event of physical property damage.
In short, it will depend on your policy, but most insurance providers and business interruption policies do not cover pandemics.
Many insurers added a clause excluding pandemics after the 2003 SARS pandemic. Insurance companies paid out claims in business disruption policies due to the SARS pandemic, and as a result, many newer policies no longer include pandemic coverage. Right: It’s another gut-punch. However, this unprecedented global event will likely lead to conversations between insurers and the insured as we navigate precise language related to claims.
At the moment, most business interruption policies go into effect if your business:
- Has sustained physical damage as a result of a disaster or accident
- Property is insured (commercial property insurance, renter’s insurance)
- The policy does not explicitly exclude pandemics
- Can quantify the losses
Now, there is some legal precedent for claiming an invisible virus/harmful agent has caused damage to your property. If the virus or someone carrying the virus visited your property and you were forced to close to clean, your business interruption service might help in that situation. However, again, if your policy specifically excluded communicable diseases, it will be hard to receive help for Corona-related economic fallout, even if you can prove property damage and quantifiable impacts.
Call your insurance broker and discuss the terms — only your insurance company will be able to tell you if your business interruption policy has a clause related to pandemics/communicable diseases.
For other COVID-19 related business content, please check out our online COVID hub for access to all our articles about business disruptions.
Types Of Businesses That Need Business Interruption Service
Here’s the general advice out there for small businesses: Any business with a physical storefront or location or any company that relies on manufactured goods and supplies from one or two distributors should invest in business interruption service.
A natural disaster could strike at any time, and the worry of not knowing if you will be able to pay your bills or your employees is a stressor that could keep you up at night. Protect your income. Protect your worker’s wages.
Commercial property insurance will cover your building and the things inside your building in the event of a fire or a storm (some disasters, such as floods and earthquakes, need additional insurance coverage), but that coverage is only for physical property damage. The long-lasting effects of the closure of your business could be disastrous. Many insurance experts recommend looking into a Business Owners Policy (BOP) that can include general liability, property, and business interruption in a package.
If you have to cease business entirely because of a disaster, your business will lose money. The quicker you get back up on your feet, the better chance your business has of surviving an accident.
Beyond that, you should think about adding an interruption policy to your risk management plan if:
- You have a physical store location
- You conduct any part of your business on the internet
- You are located in an area of the world that sometimes experiences a natural disaster (hurricane, tornado, ice-storm, flooding, wildfires)
- You could not pay your employee’s income if your business closed for a few weeks
- Your business depends on other companies for supplies
- You need other leader properties around you to draw traffic to your store
- Your business depends on manufacturing from one specific supplier
- You deal in volatile materials
Why these certain elements? There are situations where one small property disaster for you or a supplier could also put your business in jeopardy. Your business can be interrupted by a supplier or manufacturing plant suffering an accident or closings its doors. Let’s say you are a brewer who relies on one specific type of barley, and your barley supplier has a bad crop. Suddenly, you can’t make your beer. Business interruption service could cover a situation like that too. If you are a small boutique located near a larger store that drives in most of your foot traffic and something happens to that leader property, your policy could cover the loss of income due to that larger store’s accident.
How Much Coverage Do You Need?
Once you’ve decided to invest in adding business interruption insurance, you will need to determine how much coverage you plan to purchase. In general, your coverage is determined by profit. How much your business needs will depend on several factors and questions:
- How easily can you keep your doors open at 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?
- Does your current location have an updated sprinkler system/is a fire risk?
- 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 (known hurricanes, tornados, 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 a handful of employees, you will need less coverage than a business that can’t easily relocate, will have to wait for their location to reopen to do business, or relies on other local businesses.
You can feel confident that you are getting the right coverage if the plan fully covers loss of income and payroll expenses, your projected gross income, and your projected net income.
Buying Business Interruption Insurance
Business interruption insurance is an add-on endorsement to your commercial property insurance, so the first place to go is to the insurance company that currently issues your commercial property insurance. If you are in the market for a new policy, or you don’t have a commercial policy or Business Owners Policy (BOP), then most places that sell business insurance will offer Business Interruption Service.
There are four easy steps for buying insurance: Know what insurance you need, gather your business documents, comparison shop, and purchase!
The websites Insureon, CoverWallet, and Coverhound offer comparison shopping, so you can view several insurers’ offers at once.
Cost may be a deterrent for some small business owners. Policies can run from as little as $750 to $10,000 a year. Business interruption policies are very specific on their limit terms: Your policy will itemize everything it will/will not pay for and up to how much. Your insurance team is responsible for walking you through the itemization.
To add business interruption coverage, you’ll need current documentation of your net income. Policies tend to pay per incident, but a low per-incident limit may not be enough if you hit your cap before you can open your doors again.
Once you add business insurance, keep careful and attentive records of your income as it fluctuates. If you need to boost your coverage, you’ll have the documents to show the insurance company your income.
Business Interruption Insurance Terms To Know Before Buying
As you sit down with your insurance agent, broker, or team leader in charge of buying insurance, educate yourself on the lingo that might come up while you plan your policy. Before you can make decisions about what kind of coverage you need, you’ll need to understand what the policy means. Here are some of the common phrases included in a business interruption insurance plan.
- Actual Loss: The policy will only cover damage related to the disaster. Not everything will get an upgrade, and if you choose to update or 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 plan will account for a specific amount of time the rebuilding/restoring will take place.
- Extra Expenses: These are the expenses that occur because of the disaster (you didn’t need a rental truck before, but now you do).
- 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 is the coverage that helps you if your business is contingent on other businesses to do business. If another company suffers a loss that affects your bottom line, then this policy would protect against your 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, and it affects your store, you may be protected from those income losses.
An interruption to regular business could happen for a plethora of reasons; even if you can’t envision a worst-case scenario, it doesn’t mean you’re exempt from encountering a loss. Since business interruption insurance can easily be added (or is included in some Business Owners Policies), it’s important to check with your insurance professional to crunch the numbers.
If you need to shut your doors for any reason, business interruption insurance will protect you, your assets, your employees, and the future of your business. Especially if you are a business in a zone with a high probability of natural disaster, this is insurance coverage you shouldn’t skip.
Looking for more resources about surviving the coronavirus pandemic? Check out our COVID-19 hub for small businesses.