Today, we’re diving into a topic that’s like the unsung hero of business protection: business interruption insurance. It’s the safety net you never knew you needed until disaster comes knocking.
Whether you’re a seasoned professional or just starting out, understanding the ins and outs of this coverage can be a game-changer when unexpected events threaten to disrupt your operations.
Topics Covered
What Is Business Interruption Insurance?
So, what exactly is business interruption insurance?
Simply put, it’s a type of business insurance coverage typically added as a rider to your existing property/casualty or comprehensive insurance package policy to protect your business from losses. It isn’t a standalone policy, so you may not find it listed separately on your insurance documents but within your policy.
Pro tip: The premiums you pay for business interruption insurance may be tax deductible as ordinary business expenses. Not only does it provide financial security during tough times, but it also offers some tax benefits.
This type of insurance kicks in if the cause of your income loss is covered in your underlying property/casualty policy. So, ensure you understand both policies’ terms and conditions to avoid any unpleasant surprises.
Now, what can trigger a claim for business interruption? Usually, it’s when there’s a direct physical loss to your property from a covered event, like a fire damaging your building. That’s when you can start making financial claims to help cover the losses from the interruption.
Typically, business interruption insurance coverage lasts until the end of the interruption period, as defined by your insurance policy. This could range from a standard 30 days to an extended period of up to 360 days with the proper endorsement. Keep in mind that there’s usually a waiting period of 48 to 72 hours before the coverage kicks in.
Business interruption insurance typically covers you from the date of the covered peril until your damaged property is fully repaired and back to its pre-disaster condition. This ensures that you’re covered for the entire duration of the disruption, helping you bounce back without bearing the full financial brunt of any setbacks.
So, how does this interruption insurance work? When something bad happens that’s covered by your policy, like a fire or a natural disaster, you can let your insurance company know and show them proof of the damage. They’ll examine your claim to see if it fits within the terms of your coverage.
Types of Business Interruption Insurance
There are four basic types of interruption insurance. Let’s break them down.
Business Income Coverage
This type of coverage is like your safety net when your business is temporarily forced to shut down due to a covered loss. It helps replace lost income and covers ongoing expenses such as payroll, rent, taxes, and other operating costs.
Extra Expense Coverage
Think of this as your backup plan for those unexpected additional costs that pop up when trying to minimize or avoid a shutdown. Extra expense coverage has your back, whether it’s renting temporary office space, paying overtime to your non-exempt staff, or covering the cost of temporary transportation or relocation.
Contingent Business Interruption Coverage
This one’s a lifesaver when your business relies on other companies or suppliers to keep things running smoothly. If a disruption in their operations affects your bottom line – let’s say a fire prevents your supplier from delivering goods – contingent business interruption coverage can compensate for your lost income.
Civil Authority Coverage
This type of coverage kicks in when government-mandated closures or limitations prevent your business from operating. Whether it’s a mandatory evacuation order or a local curfew issued by authorities, civil authority coverage can help cushion the blow by compensating you for your lost income.
What Does Business Interruption Insurance Cover?
Now, let’s talk about what this coverage includes. Picture this: your business is forced to shut down temporarily due to a covered event. Business interruption insurance typically covers the following areas:
- Profits: Your policywill reimburse your business for profits that would have been earned if your company hadn’t suffered an interruption.
- Fixed costs: Operating expenses and other business costs are typically covered.
- Temporary location: If you have to move your business to a temporary location, your policy may cover your costs.
- Commission and training cost: If you must buy new equipment and retrain your employees, your business interruption insurance policy may cover your expenses.
- Extra expenses: This coverage reimburses reasonable expenses beyond your fixed costs that help keep your business operating.
- Civil authority ingress/egress: If a government-mandated closure causes direct financial losses, business interruption insurance may cover those costs.
- Employee wages: This coverage can help you avoid losing employees if your business is shut down by paying their wages until it is fully operational.
- Taxes: Businesses aren’t exempt from taxes when disaster strikes, so this coverage ensures your business can pay taxes on time and avoid penalties.
- Loan payments: This coverage can be crucial to your business by helping you make loan payments.
What Does Business Interruption Insurance Not Cover?
Let’s talk about what business interruption insurance won’t cover. Standard business interruption insurance policies do have their limits and typically won’t cover the following:
- Broken items resulting from a covered event or loss (such as glass)
- Flood or earthquake damage, which are covered by a separate policy
- Undocumented income that’s not listed on your business’s financial records
- Utilities
- Pandemics, viruses, or infectious diseases (such as COVID-19)
Pro Tip: Your insurance company will only pay out if your business suffers a loss due to the interruption. There’s a limit to how much you can recoup from the policy—it won’t exceed what’s stated in your policy. So, it’s essential to understand the specifics of your coverage.
Cost of Business Interruption Insurance
Business interruption insurance costs vary based on factors such as industry, location, revenue, claims history, and coverage levels. Hence, speaking with a local insurance agent is vital to getting a customized policy that meets your needs.
That said, small businesses pay an average premium of $500 to $3,000 annually for business interruption insurance, or between $41 and $250 monthly.
Conclusion
Understanding business interruption insurance can be a game-changer for any business owner, whether they’re just starting out or have been in the game for years. It’s like having a safety net that kicks in when disaster strikes, helping to replace lost income and cover ongoing expenses. From profits and fixed costs to employee wages and loan payments, this coverage can provide much-needed financial security during tough times.
However, it’s essential to know what isn’t covered, like broken items or pandemics, and to remember that there are limits to what the policy will pay out. So, while it’s a valuable protection, it’s crucial to understand the specifics of your coverage to ensure you’re fully prepared for any interruptions that may come your way.
Need to learn more about business interruption insurance?
Our agents are ready to help you out, so contact us to learn how we can customize your insurance policies to meet your needs.
*Disclaimer: We offer content for informational purposes; Co-operative Insurance Companies may not provide all the services or products listed here. Please contact your local agent to learn how we can help with your insurance needs.
Sources
Forbes. How Much Does Business Insurance Cost? https://www.forbes.com/advisor/business-insurance/small-business-insurance-cost/
Insurance Business Mag. What do the top business interruption insurance policies in the US cover? https://www.insurancebusinessmag.com/us/news/breaking-news/what-do-the-top-business-interruption-insurance-policies-in-the-us-cover-325391.aspx
Investopedia. Business Interruption Insurance: What It Covers, What It Does Not. https://www.investopedia.com/terms/b/business-interruption-insurance.asp
The Balance. How Much Does Business Interruption Insurance Cost? https://www.thebalancemoney.com/how-much-does-business-interruption-insurance-cost-5213026