The Complete Guide To Business Interruption Insurance

One of the worries a business owner might have is: What would happen if I had to close up shop due to an accident or disaster? Business interruption insurance covers you in this situation and assists you with expenses that are directly affected by halting your business operations. 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. Business interruption insurance lifts the burden from your shoulders.

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, a 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 what it is, how it works, exactly what it covers, and how to buy it.

What Is Business Interruption Insurance?

According to The Hartford, a leader in insurance:

Business interruption insurance is insurance coverage that can help supplement a business’ income if the business can’t operate due to a covered loss.

While your property insurance might cover the physical damage of a fire or hurricane, it does not cover financial business losses. Business interruption insurance differs from a standalone commercial property insurance policy in that it includes protection for the financial aspects of your business. This is why business interruption insurance is also known as business income insurance.

How Does Business Interruption Insurance Work?

If you have to shut down your business for any amount of time due to physical damages from a disaster or accident, business interruption insurance will protect your income, cover your employees’ payroll, and help you move to another location. This applies whether your business completely shuts down (i.e., it’s impossible for you or your employees to work) or if you need help to continue operating until your business is back in the position it was before.

Say, for example, that your office catches on fire and you have to transition to remote work while the building is repaired. Business interruption insurance will take care of the financial losses involved with the transition, such as having to buy laptops and have them mailed via expedited shipping.

To claim business interruption, your business must have closed due to physical damage to its assets. Most business interruption policies include a clause stating that the closure can either be complete or partial — always check your contract to be sure. Plus, with the right indemnity period, this coverage lasts until you’re able to resume your normal business operations. (The indemnity period is the timeframe in which you’re actively receiving payments from your insurance company to cover the losses caused by your business’s damage. It’s usually carried out in 12-month increments — some policies have a strict 12-month coverage period whereas others will have up to 36 months.)

You may be underinsured 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 (BOP). For more information on those policies, visit our article on the types of insurance you might need.

What Does Business Interruption Insurance Cover?

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. They will always center around the financial losses your business experiences due to an unexpected closure — never physical ones.

What Business Interruption Insurance Covers

Here’s an overview of the coverage you can expect:

• 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. Note that business interruption insurance is limited to either your business’s projected gross income or your net profits.
• 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.
• Your Taxes: If you owe taxes or are paying property taxes on a location that you can’t access, business interruption insurance will help.
• Extra Expenses: If you’re incurring expenses outside of what you normally would have to pay during your normal business operations, like if you need to buy extra equipment or pay for your employees’ hotel rooms, then that will be covered, too.

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, specific losses and risks are not covered for most business interruption insurance policies.

• Property Damage: Business interruption insurance doesn’t reimburse you for damage to your buildings, equipment, or stock. Your commercial property insurance will cover those losses.
• Undocumented Income: Outdated records may hurt you. If you gave raises or 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.
• 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: 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.
• 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.)

Who Needs Business Interruption Insurance?

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 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’re located in an area of the world that sometimes experiences natural disasters (hurricanes, tornados, ice storms, flooding, wildfires)
• You could not pay your employees’ 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’re 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’re 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 Business Interruption Insurance 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?
• 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 (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.

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. You can feel confident that you’re getting the right coverage if the plan fully covers loss of income and payroll expenses, your projected gross income, and your projected net income. 

How Much Does Business Interruption Insurance Cost?

Business interruption insurance is an add-on endorsement to your commercial property insurance, so if you’re in the market for a new policy, or you don’t have a commercial policy or business owners policy, then most places that sell business insurance will offer business interruption insurance.

According to Insureon, another leader in the insurance world, the average cost for business interruption insurance is between $40 and $130 a month. However, because business interruption plans are bundled with a BOP, finding the price for it on its own may be difficult.

How To Get Business Interruption Insurance

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. The first place to go to buy it is to the insurance company that currently issues your commercial property insurance.

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 interruption 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.

If you’re just looking into buying insurance for your business, there are four easy steps: Know what insurance you need, gather your business documents, comparison shop, and purchase!  Insureon, CoverWallet, and Coverhound offer comparison shopping, so you can view several insurers’ offers at once. Cost may be a concern for some small business owners, but don’t let that deter you — business owners policies can run from as little as $500 up to $2,000 a year from insurance companies like Nationwide.

How To Understand Your Business Interruption Insurance Policy 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 in order 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.

Business Interruption Insurance FAQs