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Business Interruption Insurance: What It Covers, What It Does Not
Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
What Is Business Interruption Insurance?
Business interruption insurance is insurance coverage that replaces business income lost in a disaster. The event could be, for example, a fire or a natural disaster. Business interruption insurance is not sold as a separate policy but is either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider.
- Business interruption insurance is insurance coverage that replaces income lost in the event that business is halted due to direct physical loss or damage, such as might be caused by a fire or a natural disaster .
- Business interruption coverage includes business income coverage, extra expense coverage, contingent business interruption coverage, or civil authority coverage.
- This type of insurance also covers operating expenses, a move to a temporary location if necessary, payroll, taxes, and loan payments.
- In rare cases, business interruption insurance can apply if a civil authority shuts down a business due to physical damage to a nearby business, resulting in a loss for a firm.
- Standard business interruption insurance does not reimburse policy holders if the business is closed due to a pandemic. Even some all-risk insurance plans have specific exclusions for losses due to viruses or bacteria.
Understanding Business Interruption Insurance
Business interruption insurance premiums (or at least the additional cost of the rider) are tax-deductible as ordinary business expenses . This type of policy pays out only if the cause of the business income loss is covered in the underlying property/casualty policy. The amount payable is usually based on the past financial records of the business.
Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy. According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days.
Most business interruption insurance policies define this period as the date that the covered peril began until the date that the damaged property is physically repaired and returned to the same condition that existed prior to the disaster. There may also be a waiting period of 48 to 72 hours.
Time is of the essence when reporting business interruptions. Consider the importance of not only filing a prompt claim but providing prompt back-up to substantiate your claim quickly.
Types of Business Interruption Coverage
Before we discuss what is and is not typically covered by business interruption insurance, it is important to understand different types of business interruption coverage. This is important because different types of coverage may include or exclude different types of claim items. The most common forms of business interruption coverage include:
- Business Income Coverage: This form of coverage assists in replacing lost income and paying ongoing expenses if your business is forced to close temporarily due to a covered loss. It can compensate for missed profits, payroll, rent, taxes, and other operating costs discussed below.
- Extra Expense Coverage: Extra expense coverage assists in covering the additional costs your company may incur to minimize or avoid a shutdown. This may include items such as renting temporary office space or equipment, paying non-exempt staff overtime, or covering the cost of temporary transportation or relocation.
- Contingent Business Interruption Coverage: This form of coverage protects your company from losses caused by a disruption in the operations of a supplier or other business partner on which your company relies. For example, if a fire prevents your supplier from delivering goods to your company, contingent business interruption coverage may help compensate for your lost income.
- Civil Authority Coverage: Civil authority coverage protects your firm from damages caused by government-mandated closures or other limitations that prevent it from operating. For example, if your firm is forced to close due to a mandatory evacuation order or a curfew issued by local authorities, civil authority coverage may be able to compensate you for your lost income.
As you peruse the lists below, be mindful of how each type of expense may pertain to only a specific type of coverage or may only be included if that coverage is opted into.
What Business Interruption Insurance Covers
Most business interruption insurance covers the following items:
- Profits: Based on prior months' performance, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
- Fixed costs: These can include operating expenses and other incurred costs of doing business.
- Temporary location: Some policies cover the costs involved with moving to and operating from a temporary business location.
- Commission and training cost: In the wake of a business interruption event, a company will often need to replace machinery and retrain personnel on how to use the new machinery. Business interruption insurance may cover these costs.
- Extra expenses: Business interruption insurance will provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the business gets back on solid footing.
- Civil authority ingress/egress: A business interruption event may result in government-mandated closure of business premises that directly cause financial loss. Examples include forced closures because of government-issued curfews or street closures related to a covered event.
- Employee wages: Coverage of wages is essential if a business does not want to lose employees while shutting down. This coverage can help a business owner make payroll when they cannot operate.
- Taxes: Businesses are still required to pay taxes, even when disaster hits. Tax coverage will ensure a business can pay taxes on time and avoid penalties.
- Loan payments: Loan payments are often due monthly. Business Interruption coverage can help a business make those payments even when they are not generating income.
Business interruption insurance is not sold as a separate policy but is an add-on to an existing insurance policy.
What Business Interruption Insurance Does Not Cover
According to the Insurance Information Institute website, you will not be covered for:
- 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’ financial records
- Pandemics, viruses, or communicable diseases (such as COVID-19)
Special Considerations for Business Interruption Insurance
Note that the insurer is only obligated to pay if the insured actually sustained a loss as a result of the interruption. The amount that will be recouped by the business will not exceed the limit stated in the policy.
Business Interruption Insurance and Pandemics
Not surprisingly, what business interruption insurance does and does not cover has come under particular scrutiny during the COVID-19 outbreak and the business shutdowns and curtailments that resulted. The answer, unfortunately, is that for the most part policy holders will not be covered.
"The standard business interruption policy only applies when the business sustains direct physical loss or damage, such as a fire," says James Lynch, FCAS MAAA, chief actuary and senior vice president of research and education of the Insurance Information Institute. "Business interruption can also apply when a nearby business sustains direct physical loss or damage and a civil authority like the government closes all businesses as a result."
Viruses don't actually break anything. As Michael Menapace, a partner at Wiggin and Dana and professor of insurance law at Quinnipiac University School of Law, told Jeff Dunsavage of the Insurance Information Institute: "The virus...[compared to a fire or broken windows from wind damage], leaves no visible imprint."
Even all-risk business interruption insurance has exclusions. And, especially since the SARS outbreak of 2003, those exclusions have tended to include losses from viruses and communicable diseases, Dunsavage notes.
How Much Does Business Interruption Insurance Cost?
The cost of business interruption insurance varies depending on a number of factors including the size of your company, the industry in which you operate, and the coverage levels you choose. Other factors that can influence the cost of business interruption insurance include your company's location, revenue, and claims history.
Business interruption insurance can cost anywhere from a few hundred to several thousand dollars each year. However, the actual cost of your insurance will be determined by the specifics of your business and the coverage options you select.
How Does Interruption Insurance Work?
Business interruption insurance works when a covered event occurs. You can file a claim with your insurance company and provide evidence of the damages incurred. Your insurer will review your claim, especially in the light of whether the event is covered under your current business interruption coverage.
What Triggers a Business Interruption Claim?
Business interruption coverage typically only activates average a direct physical property loss arising from a covered event occurs. You may only make financial claims if this event has caused damage to your physical location
Is Business Interruption Claims Subject To a Limit?
Yes; your coverage for business interruption coverage is often limited to an amount based on a certain amount of activity over a certain amount of time. For example, some coverage may restrict business interruption coverage to a 12-month financial period. In addition, there may be limits to the types of expenses that can be claimed or the types of revenue lost that may be claimed.
Business interruption insurance is intended to compensate you for lost income and additional expenses incurred as a result of an unexpected disruption in your business operations. Certain situations and conditions, however, may not be covered by your policy. Ensure you understand your specific policy to avoid surprises on what may or may not be covered should your business be interrupted.
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Last updated 8/25/2023
Issue: Business interruption (BI) insurance, also called business income insurance, helps small businesses protect against monetary losses due to periods of suspended operations when a covered event, such as a fire, occurs and causes physical property damage. The coverage allows businesses to pay fixed expenses, including costs incurred while operating at an offsite location, while the property is closed for repairs and restoration. Policies also reimburse owners for lost revenue that would have otherwise been earned if the business remained open. Business interruption policies are typically bundled within a larger businessowner’s policy (BOP) that includes business property and liability coverages. Companies with 100 or less employees with revenues of up to $5 million or less are eligible for these plans. It is estimated that between 30-40% of small business owners carry business interruption insurance.
Background: According to the Federal Emergency Management Agency (FEMA), about 25 percent of businesses fail to reopen after a disaster strikes. One component of adequate disaster preparedness for small businesses includes purchasing a business owner’s insurance policy, or BOP. A BOP is the most commonly purchased policy by small businesses and includes general liability, commercial property/business property coverage, and business interruption insurance.
- General liability: Also known as business liability insurance, this coverage protects the business from liability claims alleging bodily injury, property damage, libel, and slander. If someone gets hurts on the business property, general liability helps pay for medical expenses. It also pays legal fees if someone files a lawsuit against the business.
- Commercial property: Also known as business property insurance, this coverage protects the business’s location and physical property, such as equipment, inventory, and furniture. Commercial property insurance can help with repair or replacement costs if a covered peril such as fire or lightening results in physical structural damages to a building or items inside the building, such as office equipment. Property that has been damaged due to riots, civil commotion, and vandalism is also usually included. Commercial property insurance works in tandem with business interruption coverage.
- Business interruption: While commercial property pays for actual physical damages or losses, BI covers lost net income due to the closure of the business while repairs are underway. These policies may cover rent or lease payments, relocation costs, employee wages, taxes, and loan payments. Business interruption does not typically cover damages or losses from flooding, earthquakes, and mudslides, although consumers can purchase additional coverages for these specific perils. Exclusions from coverage include losses unrelated to property damage, such as lost revenues due to viral outbreaks or pandemics.
Civil authority coverage: Business interruption policies may contain a clause for civil authority coverage. If a state, local, or federal government entity prohibits access to the business premises, and thereby forces businesses to temporarily close, BI insurance may cover lost income through a civil authority clause. The civil authority provision in a standard BI policy form issued by the Insurance Services Office (ISO) stipulates certain provisions be met to trigger coverage:
- Access to the premises must be completely prohibited; and
- physical damages must be present near the insured property; and
- damages must be caused by a peril covered under the property policy.
Civil authority coverage usually applies in the wake of natural disaster events where physical damages have occurred within a specific proximity to the insured’s business, even if the business itself is not damaged . For example, a tornado strikes an area of town causing structural damage to buildings and authorities cordon off the area, restricting ingress and egress to property. As a result, a businessowner in that area cannot access his property and must temporarily close his business. Civil authority in this instance may be triggered since physical damages were sustained to properties within the surrounding area of the insured business, access to the business owner’s property was restricted because of a city mandate, and the peril causing the damages (a tornado) was covered in the policy. As each policy is unique and wording may differ, policyholders should consult the specifics in their contract.
Additionally, there are two more types of business interruption insurance policies: contingent business interruption and extended business interruption. These are optional coverages that are available as riders to a standard business interruption policy.
- Contingent business interruption (CBI): Contingent business interruption insurance policies protect against losses from supply chain disruptions, but may require the occurrence of property damage to trigger coverage When supply chain disruptions or closures occur with suppliers, vendors, or other companies a business relies on, a business may be eligible for payouts with CBI. For example, a print media publisher that relies on a single print company that goes out of business would utilize CBI to recover lost business revenues due to the print company’s closure. These policies provide businesses with cash to help cover payroll, rent, and other expenses to keep the business open. Like business interruption insurance, payouts on CBI claims are typically related to physical damage or other commercial property claims.
- Extended business interruption (EBI): This policy covers the intermediary period between when a business property is repaired, but before its income returns to pre-loss levels.
The cost of business interruption insurance depends on a variety of factors, including the type of industry, the number of employees, and the amount of coverage needed. A business’s physical location may also factor into the total cost. For example, if the business is in a high-risk area that is prone to wildfires or hurricanes the premiums may be higher than for those businesses located in lower-risk locations.
Pandemics & Business Interruption
Insurers started excluding viral and bacterial infections from their BI policies after the SARS (Severe Acute Respiratory Syndrome) outbreak in 2003 caused massive losses to insurers, including a $16 million BI payout to Mandarin Oriental, a hotel chain in Asia. In 2006 the Insurance Services Office (ISO) developed an exclusion for losses due to virus or bacteria. Since then, many insurers have edited their policy language to specifically exclude bacterial and viral outbreaks.
It is important to make the distinction that not all BI policies are “one size fits all ” and in some instances, coverage due to viral outbreaks may vary depending on the policy. For example, an all-risk policy does not distinguish between losses due to forced government closures (civil authority) or physical loss since all-risk policies cover all perils except those that are specifically excluded. Additionally, other coverages may have exclusions for losses resulting from mold, fungi, or bacteria; however, since COVID-19 is a virus, that exclusion may not apply. The policy language is critical to understanding what is included and excluded from coverage. If there is a specific exclusion for virus-related losses outlined in the policy, it could be more difficult for businesses to successfully appeal a denial for coverage. Consumers should consult their insurer or agent to learn the specifics of their policy.
State Legislative Activity & Industry Response
As of August 2020, ten states ( New York , Massachusetts , New Jersey, Louisiana, Ohio , Pennsylvania , Rhode Island , California , Michigan , and South Carolina ) had drafted legislation that would force insurers to retroactively pay for BI losses incurred by the coronavirus shutdowns. New Jersey was the first state to introduce legislation, but ultimately tabled the original bill . Additionally, Louisiana legislators modified Senate Bill 477 to include a proposal requiring insurers to be more transparent about specific exclusions on policy contracts after facing criticism about the original bill’s content. Language specifying the requirement of retroactive insurance coverage for COVID-19 was eliminated in the final version of the bill. The modified legislation passed the Louisiana Senate on May 19, 2020.
Opponents argue retroactively rewriting contracts is unconstitutional under Article 1, Section 10 in the U.S. Constitution’s Contract Clause , which asserts that states have limited ability to interfere with private contracts. If there is no resolution, then it is likely that any debate over BI coverage between insureds and their insurance companies regarding coronavirus damages will be litigated in the courts.
The insurance industry opposes retroactive BI payments due to concerns about insurer insolvency and subsequently, the inability to pay existing policyholders’ claims. According to the American Property Casualty Insurance Association (APCIA), the industry holds a nearly $800 billion surplus to pay all future losses. APCIA notes this surplus is insufficient to cover the estimated $255 to $431 billion per month in BI claims. Enforcing retroactive BI payments could bankrupt the industry in 2 to 3 months, during a time when insurers will see claims activity rise from damages due to severe weather and natural catastrophes.
Pandemics are viewed by the insurance industry as uninsurable events because they affect policyholders everywhere at the same time. Experts posit that only the federal government has the financial resources necessary to cover pandemic risks.
On May 22, 2020 U.S. Representative Carolyn Maloney (D-NY) introduced H.R. 7011 , the Pandemic Risk Insurance Act (PRIA). The bill is modeled after the Terrorism Risk Insurance Act (TRIA) and would function as a public-private partnership between the federal government and insurance companies. The federal government and insurance companies would share costs associated with pandemic losses. The legislation, if passed, would not be retroactive and participation by insurers would be voluntary. Industry support of the bill is divided . Some industry groups, such as the American Property Casualty Insurance Association (APCIA) and the National Association of Mutual Insurance Companies (NAMIC), have expressed concerns over the bill. Both associations believe the full cost of the program should be funded by the federal government, arguing that terrorist attacks and pandemics are different types of risks based on frequency of occurrence and geographical concentration. However, the American Academy of Actuaries (AAA) supports a federal reinsurance program. The AAA states that “pandemic risk is more similar to the catastrophic risks covered by programs like the Terrorism Risk Insurance Program and the National Flood Insurance Program than to risks normally insured by the commercial insurance market and any new federal program seeking to facilitate pandemic risk coverage should reflect that difference.”
Other representatives also introduced legislation relating to insurance and pandemics. On April 14, 2020, Rep. Mike Thompson (D-CA) introduced H.R. 6494, the “Business Interruption Coverage Act of 2020.” The legislation appears to be retroactive in nature and would require insurers who provide BI coverage to include losses from pandemics or government-ordered business closure. Another bill, H.R. 6497 , the “Never Again Small Business Protection Act,” proposed by Rep. Brian Fitzpatrick (R-PA), also requires insurers to cover losses associated with viruses or pandemics, but it includes a provision requiring a federal reinsurance backstop. On May 20, 2020, the NAIC submitted a letter to the U.S. House Committee on Small Business opposing proposals that would require insurers to retroactively pay claims for COVID-19 claims.
According to the Allianz Risk Barometer , business interruption insurance (34%) is one of the top three global business risks in 2023, along with cyber incidents (34%) and macroeconomic developments (25%). It will be important to monitor continuing developments in the BI sphere, especially as lawsuits from larger companies and organizations (such as Major League Baseball) move forward. Larger corporations usually have more tailored policies that do not always include specific virus-specific exclusions that smaller business commonly incorporate into their contracts. The Penn State Covid Coverage Litigation Tracker , which updates statistics in Covid-related BI litigation, has found the majority of courts so far have ruled in favor of insurers in motions to dismiss or for summary judgment. In 2021 only one case, Hopps Ltd. vs. Cincinnati Insurance Co. , moved to a jury trial. In late October, the jury rendered a verdict for the defendant in the first jury trial for Covid business interruption losses.
Status : On March 25, 2020 the NAIC released a statement on Congressional actions related to COVID-19 and the insurance industry. In the statement, the NAIC opposed proposed legislation that would require insurance companies to retroactively pay for claims arising out of the COVID-19 pandemic losses that were not covered under the original policy, arguing that such actions could create a substantial solvency risk and undermine the ability of insurers to pay other types of claims. Further, the NAIC noted that insurance is not the ideal product to cover pandemic losses, due to the widespread nature of disease and the substantial number of policyholders affected simultaneously. Instead, the NAIC recommended direct federal intervention to address economic disruption related to the current COVID-19 pandemic and offered to work with Congress on potential solutions.
In May 2020, state insurance regulators, through the NAIC, developed and issued a data call to collect business interruption information from insurers. This data will assist state insurance regulators and others in understanding which insurers are writing applicable coverage, the size of the market, and the extent of exclusions related to COVID-19. Preliminary results show that nearly 8 million commercial insurance policies include business interruption coverage. Of that amount, 90% were for small businesses, as defined as having 100 or fewer employees; 8% for medium businesses, and 2% for large businesses, as defined as having more than 500 employees. Significantly, 83% of all policies included an exclusion for viral contamination, virus, disease, or pandemic and 98% of all policies had a requirement for physical loss. Exclusions and physical loss requirements were slightly more likely to occur in small business policies as compared to large business policies. Insurance regulators are also regularly collecting loss and claims data in order to obtain a sense of how claims are developing and the extent of payments by insurers.
An October 22, 2020 NAIC report detailing business interruption claims and loss data disclosed that U.S. insurers have received 201,285 claims for business-interruption losses caused by coronavirus orders. Of those, 164,178 were closed without payment, 34,106 remained open and 3,001 were paid.
The Center for Insurance Policy & Research (CIPR) hosted a special event about business interruption and pandemics at the NAIC's Fall Virtual National Meeting on Dec. 8, 2020. Titled Pandemic Business Interruption Federal Insurance Mechanism - Learning from the Past, Thinking About the Future , the event featured industry, government, and academic speakers. The program , its agenda , and speaker biographie s are available to view.
Committees Related to This Topic
Property and Casualty Insurance (C) Committee
The History and Development of Business Interruption Insurance ( Journal of Insurance Regulation , 2022)
NAIC Legal Division: Business Interruption Litigation Update (Dec. 2021, starts on pg. 16)
Regulator Insight: Business Interruption Insurance & Pandemics (CIPR Research Library, Dec. 2020)
NAIC letter to U.S. House Financial Services’ Subcommittee on Insurance regarding the hearing on “Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers” (Nov. 19, 2020)
Many Businesses Thought They Were Insured for a Pandemic. They Weren't . ( Freakonomics podcast, Oct. 28th, 2020, 40 min.)
Feasibility Questions About Government-Sponsored Insurance for Business Interruption Losses from Pandemics ( Journal of Insurance Regulation , September 2020)
Business Interruption Insurance and COVID-19: Coverage and Issues and Public Policy Interpretations ( Journal of Insurance Regulation , June 2020) Read a brief article overview .
Covid Coverage Litigation Tracker (University of Pennsylvania's Carey Law School)
COVID-19 and Business Income (Interruption) Insurance Fact Sheet (Insurance Information Institute, June 2020)
NAIC Insurance Brief: COVID-19 and Insurance (NAIC, March 2020)
Pandemic Business Interruption Insurance Coverage: Insights from WSB Survey of Insurance Experts (Wisconsin School of Business & CIPR – May 2020)
Business Interruption Basics ( May 28, 2020, YouTube, Future of American Insurance and Reinsurance)
Fact Sheet: Understanding Business Interruption Insurance and Pandemics ( Insurance Information Institute)
Do I Need Business Interruption Insurance? (Insurance Information Institute)
Insurance Industry’s Response to COVID-19 (III, April 24, 2020)
The True Costs of Rewriting Business Income (Interruption) Policies (III, April 28, 2020)
Business Interruption Insurance and COVID-19 ( Congressional Research Services , March 31, 2020)
Understanding Business Owner’s Policies (BOP) (Insurance Information Institute)
Covering Losses with Business Interruption Insurance (Insurance Information Institute)
The Risk of Pandemics to the Insurance Industry . (CIPR, 2015)
NAIC Session on Business Interruption Coverage Garners Strong Participation (Dec. 9, 2020)
NAIC 2020 Fall National Meeting to Include Special Session on Business Interruption (Nov. 11, 2020)
Media queries should be directed to the NAIC Communications Division at 816-783-8909 or [email protected] .
Aaron Brandenburg Assistant Director, P&C Regulatory Services (816) 783-8271
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What Is Business Interruption Insurance? What It Covers, How to Get It
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Table of Contents
What is business interruption insurance?
What does business interruption insurance cover, how much does business interruption insurance cost, do i need business interruption insurance, how to get business interruption insurance.
Business interruption insurance helps make up for the revenue your business loses while recovering from an accident or disaster. This kind of business insurance can also help cover extra expenses, like renting a satellite office, while you rebuild.
Business interruption insurance, which is also called business income insurance , is a good choice for business owners who would be forced to stop operations due to property damage. It’s not usually sold on its own, but you can buy it as part of commercial property insurance or a business owner’s policy .
Business interruption insurance typically covers:
Lost revenue during the recovery period.
Rent, mortgage or lease payments.
Training employees to use replacement equipment.
Look for a business interruption insurance policy that includes extra expense coverage . This covers costs like:
Renting a temporary space.
Outfitting that temporary space.
Spending extra money, such as paying a contractor overtime, so repairs move faster.
» MORE: What does business insurance cover?
In order for business interruption insurance to pay out, the event that caused the loss — that is, the natural disaster or accident — must be covered under your commercial property insurance policy . That means if your business is forced to close by a fire, hail damage or vandalism, you’re covered. But if the cause is a flood or earthquake, you’re not unless you have additional coverage that protects against those risks.
What isn't covered by business interruption insurance?
Business interruption insurance typically doesn’t cover losses caused by:
Pandemics or disease outbreaks.
Business interruption insurance won’t cover revenue that isn’t documented in your business financial records. It also doesn’t pay out to cover repairs themselves — that’s what business property insurance is for.
» MORE: How to get business insurance
Business interruption costs vary by industry, location, number of employees and how much coverage you want. If you’re in an area with a higher risk of certain natural disasters, you might pay more.
Like with other business insurance costs , you’ll also likely pay more for more coverage. To determine how much coverage you want, think about your revenue forecasts and how long it might take to get your business back up after certain types of events. Also, consider whether your current work area is well protected and how hard it would be to find a temporary location.
As with most types of business insurance , you can pay extra to extend your business interruption insurance protections. Additional coverage options include:
Civil authority: Pays you when the government blocks off access to your business because of damage to something nearby.
Alterations and new buildings: Pays you if your business is damaged by alterations to your building or construction nearby.
Interruption of computer operations: Pays you if a computer virus or something else causes the destruction or corruption of your company’s electronic data.
Does business interruption insurance have a deductible?
Business interruption insurance usually doesn’t start paying out until 72 hours after the damage occurs. This is essentially your deductible — three days of lost revenue.
Business interruption insurance coverage typically ends 30 days after property repairs are complete or after 12 months.
If damage to your building, equipment or inventory would force your business to shut down or operate at reduced capacity, business interruption coverage is a good idea.
However, if your team could work remotely or if you don’t manufacture your own items, you may be able to get by without it.
The easiest way to get business interruption insurance is as part of another insurance policy.
If you have 100 or fewer employees or annual revenue below $5 million, consider a business owner's policy. These policies usually include business interruption coverage along with other basic protections, like general liability insurance and commercial property coverage. However, some industries (such as restaurants) may not be eligible for a BOP due to their specific risks.
If you own a larger business or valuable pieces of property, you likely need commercial property insurance on its own, not as part of a BOP, so you can modify the coverage to meet your specific needs. If that’s you — whether you own a dentist’s office or a commercial kitchen — check whether your policy already includes business interruption insurance and talk to your insurer about adding it if it doesn’t.
Virtually all business insurance companies sell commercial property insurance and business owner’s policies. Get multiple quotes to see which policies include business interruption insurance and find coverage at the best price.
» Get coverage: NerdWallet’s picks for the best small-business insurance companies
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Eight Key Concepts to Understand in Business Interruption Coverage
By Michael Rouse ,
US Property Practice Leader
The COVID-19 pandemic has resulted in unprecedented disruptions for businesses and the economy. Compounding the challenges for businesses are recent civil unrest in major cities along with the early days of what may be an active Atlantic hurricane season. These trends mean it’s vital for risk professionals to know how their property insurance policies — including business income or business interruption coverage — may respond to potential losses.
What’s in a Business Income or Business Interruption Clause or Endorsement?
Many insurers’ property policies include business interruption or business income either as a coverage within the form; others, including those insurers that use Insurance Services Office (ISO) forms for their policies’ content, add this coverage via endorsement. A business interruption clause or endorsement is designed to protect the insured for losses of business income it sustains as a result of direct physical loss, damage, or destruction to insured property by a covered peril.
While many such clauses are in use today, a typical business interruption insurance clause might read as follows:
We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to insured property. The loss or damage must be caused by or result from a covered cause of loss.
Although the contents of individual policies and endorsements may vary slightly, many use relatively consistent language to describe business interruption coverage. To better understand this coverage and how it might respond to potential losses, it’s important for risk professionals to focus on eight key concepts.
Actual Loss Sustained
Business interruption coverage protects against an actual loss sustained by an insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy. The insurer is only obligated to pay if the insured actually sustains an interruption of business leading to a business income loss. This loss, however, is subject to the policy limit or sublimit that is applicable to the specific location where the loss occurs or the type of peril that leads to the loss.
Usually, an insurer is responsible for the reduction in net income that results from suspension of operations — whether wholly or partially — due to a physical loss at an insured’s premises. Generally, insurers consider business income to include:
- Net income (net profit or loss before income taxes) that would have been earned or incurred by an insured.
- Normal operating expenses incurred, including payroll, that continue despite the suspension of operations.
Period of Restoration
Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair, or replace damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced and the location is made ready for normal operations to resume.
Expiration of the policy does not end the period of restoration; as long as the insured’s physical loss occurs during the policy period, a business interruption endorsement will provide coverage for the duration of the period of restoration.
An endorsement published by ISO includes a 30-day extended period of restoration provision beyond the standard period of restoration, as do some insurers’ forms. This provides additional coverage after an insured business resumes operations following the date of repair or replacement of the damaged property, which can be crucial since it may take time for the business to return to pre-loss income levels. However, if an insured requires more than this 30-day limit, it may be able to increase this limit — from 30 days to any multiple of 30 days up to 720 days — by purchasing an extended period of indemnity optional endorsement.
A business interruption clause in a property policy or added endorsement can provide additional coverages, including for extra expense. This extension covers necessary expense sustained by an insured during the period of restoration that would not have been incurred had there been no physical loss to real or personal property caused by a covered peril.
When a business income loss occurs, an insured is obligated to take reasonable steps to prevent or minimize it. Any expenses incurred to reduce the loss are covered as part of the business income loss, as long as they do not exceed the loss itself.
An insurer will typically not pay any part of the expense that is more than the claim itself. For example, an insurer will reimburse an insured $100 to reduce the business income loss of $200, but will not reimburse the insured $100 if the claim is only reduced by $50. Any additional expenses above this $50 amount that are incurred to continue the business may be recoverable under an extra expense provision in an insurance policy.
Business income clauses or endorsements may also include “extensions of coverage” wherein the insured’s policy will insure against business income losses resulting from certain specified events. These include service interruption, contingent business interruption, leader property, and interruption by civil or military authority. A sublimit typically applies for each additional coverage.
If included within the policy, a service interruption extension typically provides business income coverage arising from direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility service’s transmission lines and related plants, substations, and equipment supplying such services to an insured business. The owners, managers, or operators of such utilities or services are not named insureds under the policy.
A physical loss, damage, or destruction at the location of the utility or service typically must be the result of a peril similar to those covered under the insured’s policy. Some restrictions on coverage may apply, however, including:
- Distance limitations, where the actual physical loss or damage to the utility’s property must occur within a specified distance in relation to the insured’s premises where the business income loss occurs.
- Exclusions for certain perils, such as earthquakes.
- Exclusions for overhead transmission and distribution lines.
- A waiting period — typically 24 or 48 hours — during which no coverage will apply unless the period of interruption of the service(s) exceeds the stipulated period.
Contingent Business Interruption (CBI)
A CBI extension is designed to cover an insured’s business income loss resulting from physical loss, damage, or destruction of property owned by others. These typically include direct “suppliers” of goods or services to an insured and direct “receivers” of goods or services manufactured or provided by the insured. The physical damage to these suppliers or receivers usually must be of a type that would be covered by the insured’s policy had the damage happened to the insured’s property.
A CBI extension typically provides coverage for the “direct” relationship between an insured’s “suppliers” or “receivers” of its goods or services. Coverage can sometimes be extended for suppliers of a direct supplier — typically known as “indirect” or “second tier” suppliers. Such coverage may require, among other things, that indirect suppliers are specifically identified.
Leader Property (Attraction Property)
A leader property endorsement provides coverage to an insured for direct physical loss, damage, or destruction — of the type insured by the insured’s property policy — to property not owned or operated by the insured, located within a stated distance to the insured’s property or business, that attracts business to the insured. Examples would include a nearby amusement park, casino, mall, or destination retail store.
Interruption by Civil or Military Authority
This extension provides coverage to an insured for the actual loss of business income it sustains during the length of time when access to its premises is prohibited by order of civil authority as a direct result of physical damage — as insured against in the policy — to property of the type insured. An interruption by civil or military authority extension is commonly found under most policies insuring business income or business interruption.
The coverage time period most commonly specified in this extension is 30 consecutive days. An insurer may also impose a waiting period — typically 48 or 72 hours — that must be reached in order for coverage to apply.
Familiarity with these critical terms and specific relevant policy language is crucial to any organization’s understanding of how business interruption coverage may or may not apply to a loss, the preparation of potential claims, and future purchasing decisions. Risk professionals — working with their advisors — should carefully review their specific policy language and other coverage options that may be appropriate given their companies’ individual needs.
What Is Business Interruption Insurance and What Does It Cover?
Business interruption insurance can help a business pay its bills while closed because of a disaster. But most policies exclude pandemics.
What Is Business Interruption Insurance?
Typically, business interruption coverage is added to a company's property insurance policy. (Getty Images)
Business interruption insurance can help a business continue to pay its bills while it is closed or its income is down because of a disaster. The coverage can be valuable if your business has to continue paying rent, employee payroll and other expenses while it is closed and not earning income – if, for example, you own a restaurant that was shut down after the building was damaged by a fire or a hurricane. Here's more information about what business interruption insurance is, how it works and what happened during COVID.
What Does Business Interruption Insurance Cover?
Most businesses have insurance that covers physical damage to their building and property if their business is damaged by a fire or natural disaster. Some businesses also have business interruption insurance, also called business income insurance, which can cover lost income and continuing expenses while the business is closed or being repaired because of the disaster. About one-third of U.S. small businesses carry business interruption coverage, says Mark Friedlander, spokesman for the Insurance Information Institute.
Most policies cover the following expenses, says Friedlander:
- Lost net income (based on financial records).
- Mortgage, rent and lease payments.
- Loan payments.
- Routine bills.
- Employee payroll.
- Relocation expenses to a temporary location.
- Extra expenses such as rent for temporary space.
"It pays your bills that continue during the interruption and any profit you would have earned. For most businesses, the most important (and biggest) thing is to continue to pay your expenses, like payroll," says Bill Wilson, an insurance consultant and author of the InsuranceCommentary.com blog and four books, including "When Words Collide: Resolving Insurance Coverage and Claims Disputes."
Business interruption insurance is an optional add-on that can be included as part of a standard business insurance policy . It typically covers the business' operating expenses in the event of a loss caused by physical damage to the building from a fire, some natural disasters or severe weather events such as a hurricane, windstorm, tornado, hailstorm, lightning or wildfire. Some policies also cover the losses if the business is closed because of theft or vandalism, riots and civil commotions, says Friedlander. "It also covers government-mandated closures for perils defined within the policy," he says.
The coverage limits vary by policy. "Each insurance contract is written differently," says Derek Ross, an independent insurance broker and president of Kulchin Ross Insurance Services in Tarzana, California. A typical policy covers the business' losses while the premises are being rebuilt or restored to normal operations, for up to 12 months, and some can continue for up to 18 or 24 months, he says. Others cover up to a certain dollar limit or require you to pay co-insurance, which is a percentage of the costs. The policy may continue to make some payouts for 30 to 90 days after the business reopens while the business slowly ramps up to its pre-loss level of sales activity, according to Ross.
What Is Not Covereved by Business Interruption Insurance?
Friedlander says that business interruption insurance typically doesn't cover the following:
- Broken items resulting from a covered event or loss (such as glass).
- Flood or earthquake damage, which are covered by separate policies.
- Undocumented income that is not listed on your businesses' financial records.
- Airborne diseases such as the common cold, flu, viruses and communicable diseases such as COVID-19.
Business owners should make sure the policy limits are sufficient to cover their operations for more than a few days, says Friedlander. "After a major disaster, it can take more time than many people realize to get back in business." Business interruption coverage usually has a restoration period, which is the length of time that a policy will help pay for lost income and extra expenses while the business is being restored. "Typically, there's a 48- to 72-hour waiting period before the period of restoration kicks in," he says.
Are Losses From the Coronavirus Covered?
This ended up being the million-dollar question last year while businesses were closed for months because of COVID restrictions. The answer is generally no. It depends on the language in the contract, but most policies specifically exclude losses from pandemics. "Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses simultaneously," says Friedlander. Insurers began adding pandemic and virus exclusions after the SARS outbreak in 2003, he says. He says that 83% of business interruption policies written in the U.S. include virus exclusions. Of the 17% that did not include a virus exclusion written in the policy, 98% included a "physical loss" requirement, says Friedlander. In that case, the policy would only pay out if the business were closed because of physical damages to the building or property.
Friedlander says that as of Nov. 30, 2020, more than 210,000 COVID-19 business interruption claims had been filed with private insurers in the U.S., mostly from small businesses. Of those claims, 85.5% were closed without payment, 1.7% were closed with a payment made to the policyholder and 12.8% remained open.
More than 1,500 lawsuits have been filed against insurers over claims for business interruption losses due to the pandemic since March 2020, says Friedlander. "Filings peaked in June 2020 and have been declining since, although new cases continue to be filed," he says. In most cases, the lawsuits have been dismissed either because viruses were specifically excluded or the policy had a "physical loss" requirement. Wilson says that most courts have ruled that the presence of the COVID-19 does not constitute direct, physical loss or damage to property, which is a requirement to trigger coverage under most business interruption policies. "In addition, about two-thirds of the lawsuits involve virus exclusions and courts have upheld insurer motions to dismiss in the vast majority of cases," he says.
Who Can Get Business Interruption Coverage?
Business interruption coverage is generally added to a company's property insurance policy. "Business interruption coverage is typically tied to a physical retail location that serves customers," says Friedlander. Small businesses may get a business owner's policy that includes property, liability and business interruption coverage.
Wilson says that any organization or individual entrepreneur who has a profit and continuing expenses should consider buying business interruption insurance. Most business owner's policies have a built-in option for business interruption coverage that usually covers a suspension of operations for up to 12 months without a dollar limit, he says. "It covers your loss of profit plus any expenses that continue following a loss until you can resume operations," says Wilson.
What Should I Do If I Think My Business Might Qualify for a Claim?
Contact your insurance agent or company if you think you might qualify for a business interruption claim. Get a copy of your policy so you can see the details of the contract, the payout requirements and exclusions and how much coverage you have. Your agent or broker can help you file a claim and can also let you know about any other relief for policyholders, says Ross. "We don't have the ability to approve or decline a claim, but we do work as the client's advocate," he says.
If you do file a claim, it's important to gather evidence showing the loss of business income. "You want to document everything," says Ross. "I recommend developing a timeline. When did your business flow start to decline? When were you forced to close? Did you make any large purchases of inventory before then?" Itemize your income and expenses over that time period, and also find out how it compares to the same time period over the past two or three years.
Keep the documentation even if the claim is denied. Having the records showing your business losses can help if you appeal the denial or if you qualify for other sources of assistance. For example, several government programs provided relief for businesses from COVID losses, such as the Paycheck Protection Program , economic injury disaster loan programs and grant programs for restaurants and bars.
Tags: money , personal finance , insurance , business , small business
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Business interruption insurance and coverage basics
Most companies know the importance of insuring their property and assets against damage or liability. But in order to cover operating expenses and income losses in the event certain catastrophes lead to the temporary closure of a business, there’s another critical safeguard to consider: business interruption insurance. Read these FAQs to learn more about business interruption coverage and how it can help your business recover after a covered loss. Keep in mind that individual policies can vary widely, so it’s always important to review your coverage options with your agent or broker.
What is business interruption insurance?
Business interruption insurance, sometimes called business income insurance, can be part of a standard business policy form or purchased as an endorsement or rider to a property insurance policy or package. It covers operating expenses and lost income for a set period of time incurred by a company that closes or is unable to operate normally as a result of physical damage to the business property by a covered peril. For example, if a fire renders a retail store unusable and it is not able to sell merchandise and generate revenue during the time it is closed for repairs, business interruption coverage could help offset income losses along with continued necessary day-to-day expenses (such as payroll and taxes).
What is covered by business interruption?
Business insurance policies vary from insurance company to insurance company, but business interruption coverage typically includes compensation for:
- Lost revenue - based on prior financial records
- Mortgage, rent and lease payments
- Employee payroll
- Taxes and loan payments - due during the covered period
- Relocation costs - if the business must move to a new or temporary location due to physical damage to the business premises
Are business income insurance and business interruption insurance the same thing?
“Business income” coverage is typically the same as “business interruption” coverage and the terms are often used interchangeably. Different insurers generally use one or the other depending on their product offerings.
What triggers a business interruption claim?
Generally, a business interruption loss is only covered if it is the result of covered physical loss or damage to property. Your policy will describe the specific events that trigger your business interruption coverage.
How long does business interruption coverage last?
Most business interruption policies have a “period of restoration” (synonyms include “period of liability” and “period of indemnity”). This is the length of time that a policy will help pay for lost income and expenses while the business is being restored. Policies typically limit the period to a specific number of consecutive days, but it is possible to obtain an extended period of time, so make sure to discuss the potential risks and coverage options with your insurance professional. Sometimes business interruption policies have a “waiting period,” which is a specified number of days after the physical damage occurs, before the policy’s coverage for business interruption loss is triggered.
How much business interruption insurance do I need?
A rule of thumb is to use a business’s gross earnings and projections to estimate future profits and determine the right amount of coverage. Your agent or broker can help you with this.
How much does business interruption insurance cost?
The cost of business interruption coverage depends on several factors, including:
- Number of employees
- Amount of coverage
- Prior loss experience
Your location can also impact the price of the policy. For example, if the business is in an area with a higher risk of certain covered perils, the cost of business interruption insurance may increase.
Are there additional business interruption coverages I should consider?
When reviewing your business interruption needs with your agent or broker, you may want to discuss whether any of the following coverages are included or can be added with an endorsement:
- Extra expense insurance - covers necessary expenses during the period of restoration that the business would not have incurred if there had been no physical damage to the property. These expenses typically relate to minimizing the time the business is wholly or partially closed and/or keeping the business running during the restoration period. For example, expenses related to temporarily relocating business operations to another building, or the need to pay overtime to hire more employees.
- Ordinance or law (sometimes called business ordinance) – in policies that provide coverage for the additional cost to repair a building to bring it up to code, ordinance or law can also cover business interruption losses arising from the increased period of time required for the repairs.
- Civil authority - extends business interruption coverage to losses incurred when an order of civil authority (e.g., state, local or federal governmental entity) prohibits access to your business premises resulting from physical damage caused by a covered peril to adjacent or nearby property (if that property is of a type that is covered by the policy)
This document is advisory in nature and is offered as a resource to be used together with your professional insurance advisors in maintaining a loss prevention program. It is an overview only, and is not intended as a substitute for consultation with your insurance broker, or for legal, engineering or other professional advice. Chubb is the marketing name used to refer to subsidiaries of Chubb Limited providing insurance and related services. For a list of these subsidiaries, please visit our website at www.chubb.com . Insurance provided by Chubb Insurance Company of Canada or Chubb Life Insurance Company of Canada (collectively, “Chubb Canada”). All products may not be available in all provinces or territories. This communication contains product summaries only. Coverage is subject to the language of the policies as actually issued.
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Business Interruption Insurance
Written by True Tamplin, BSc, CEPF®
Reviewed by subject matter experts.
Updated on June 08, 2023
Ask a Financial Professional Any Question
Table of contents, what is business interruption insurance.
Business Interruption Insurance, also known as Business Income Insurance or Contingent Business Interruption Coverage, is a type of coverage that safeguards businesses from losses incurred when operations stop due to a disaster.
It is never sold as a standalone policy, but it can be added to either a commercial property insurance policy or a commercial package policy.
It may also be included in a Business Owner's Policy (BOP) bundle, along with general liability insurance and commercial property insurance.
If an event that the policy covers, such as theft, fire, or severe weather conditions, forces the business to close temporarily, this income replacement insurance helps replace lost business earnings and other eligible expenses .
Business interruption insurance bridges the gap between income and expenses during a business's restoration period, which begins several hours or days after a covered event forces a suspension of operations, and ends when the repairs from said damage are completed.
What Is and Is Not Covered in Business Interruption Insurance?
Like any insurance policy, business interruption insurance has rules on what it does and does not cover. Below is a guide on its inclusions and exclusions:
Business Interruption Insurance Inclusions
If a company is forced to close due to a covered loss, business interruption insurance can help pay some of the operating expenses to keep the business going, such as:
- Lost Revenue: This is the potential revenue the business would have made if it operated as usual.
- Mortgage Payments : These are payments that need to be made if the property the business was operating from was mortgaged or leased .
- Loans : These are payments for any loans previously taken out to finance the business.
- Taxes : These are payments for any business taxes that may be due even when operations have temporarily ceased.
- Payroll : This is the rightful compensation employees must receive in exchange for the services they have rendered the company.
- Relocation Costs: These are the costs involved when a business is forced to move to and operate from a temporary location.
- Training Costs: These expenses may be incurred when employees need to be trained to operate new or replacement machines and equipment.
Business Interruption Insurance Exclusions
Some expenses are not covered by business interruption insurance, and these are the following:
- Flood or Earthquake Damage: These natural calamities are covered by a separate insurance policy.
- Damaged Property: Any broken items may be covered under commercial property insurance.
- Undocumented Income: This type of income is not covered, usually because it has not been indicated on a company’s financial records.
- Communicable Diseases: This type of occurrence is not covered because it does not result in actual physical loss or damage to the business.
- Utilities: Since the location the business typically operates from is closed, no utility expenses are expected.
Business Interruption Insurance Coverage
The total amount a company’s business interruption insurance will cover during a claim is influenced by two significant factors: the restoration period and the coverage limit.
Determining these details is very important because if the business interruption costs exceed the limits of the chosen policy, then the business owner will have to cover those expenses.
The restoration period is the duration of time the business interruption coverage will help pay for lost income. It can last for as little as 30 days up to 12 months after the covered event occurred. For an extra fee, it can even be extended up to 24 months.
In addition, most policies have a 48 to 72-hour waiting period before the restoration period kicks in. This means that any closures that occur only within the waiting period are not covered by business interruption insurance.
Initially, the business owner chooses the amount covered in the business insurance policy.
Before signing any contracts, they should consider if the coverage they wish to acquire will cover enough expenses to keep the company running smoothly if a claim needs to be made on the business interruption insurance.
An excellent way to start thinking about this coverage amount is by factoring in the gross earnings and using that information to estimate future profits . That way, the business owner will be more likely to choose a policy with the proper coverage.
In addition, here are some key points that business owners can consider when determining the coverage they need:
- After experiencing a physical loss or damage, how long would it take the business to recover?
- If needed, after the business experiences a covered loss, is there another place to rent in the same area as a temporary location?
Business Interruption Insurance Cost
The amount that small business owners pay for annual business interruption insurance premiums can range from $500 to $3,000. The exact price is based on multiple factors:
- Type of Industry : Industries with a higher risk for physical losses will need to pay more for the same coverage. For example, a repair shop is more prone to fire damage than a sales office, so it will most likely spend more on business interruption insurance.
- Geographic Location : Businesses in geographic areas more prone to experiencing damage from natural disasters like windstorms and wildfires might pay more for business interruption insurance.
- Revenue Range : As a company’s projected revenue range increases, so will the premiums they need to pay.
- Scope of Coverage : Business interruption insurance with a broader, more comprehensive coverage costs more. For example, standard policies do not include income losses resulting from power outages, but this can be added for an extra fee.
- Choice of Insurer : The prices charged by different insurance companies can differ. Therefore, business owners can choose which company offers the best service equivalent to the fee they are charging.
Who Should Get Business Interrupt ion Insurance?
Most small business owners should consider investing in business interruption insurance, especially if they rely on physical locations or assets that could be damaged by events such as fire, theft, or severe weather.
This may include businesses like retail shops, coffee shops, restaurants, salons, spas, yoga studios, and pet groomers.
Having a business interruption insurance policy in place can help businesses like these recover quickly from unforeseen incidents which might disrupt their regular operations.
How to Process Business Interruption Insurance Claim
If you need to file a business interruption insurance claim, you may follow these steps:
Step 1: Notify the Insurance Company
After a covered event, you need to contact your insurance company immediately. Once you complete that initial step, you will be assigned a claims adjuster by your insurance company.
This individual will work with you closely throughout the claims process to evaluate what happened and explore ways to help your business generate revenue again as soon as possible.
Step 2: Check Your Coverage Limit
Be sure to know precisely what your business interruption policy covers. This way, you will be less likely to have any surprises.
Most policies will outline this information on a "declarations page" that can typically be found near the beginning of the document.
Step 3: Provide Proof of Documents
You will need to verify your past income and expenditure as part of claiming business interruption compensation. Acceptable documented proof can include the following:
- Recent financial statements (from one to two years)
- Estimated future revenue
- Payroll documents
- Business tax returns
- Leases for property or equipment
- Agreements with vendors or customers
- Canceled orders (specifically due to the closure)
- Inventory records
You must refrain from discarding financial documents even if they are partially damaged.
Step 4: Document Extra Expenses
Keep any documentation of extra expenses that your policy covers and that you would not have otherwise. Examples of these expenses include:
- Compensation for employee overtime
- Costs for moving or cleaning services
- Charges for protective equipment
- Security fees for the damaged property
- Payment for storage space
The contentious question of whether business interruption insurance should cover losses due to the pandemic is still unresolved.
The insurance industry argues that there is generally no coverage for pandemics, but many businesses have been fighting for their losses in court.
The Insurance Journal mentions two such cases and in both situations, the judge was on the insurance company's side, which gives little hope to other such cases.
In the case of Social Life Magazine v. Sentinel Ins. Co., which was tried in the Southern District of New York, the judge rejected a magazine publisher's request for the court to require its insurance company to cover losses from having to shut down due to government mandates.
Even though the ruling favored the insurer, it only found that chances were slim that the publisher would win if tried under New York state law.
The case of Gavrilides Management Company et al. vs. Michigan Insurance Co., gives more clarity on similar situations. The judge ruled that the insurance company was not liable for any financial compensation because the business incurred no physical damage.
The plaintiff, who owned a restaurant in Michigan, said that the policy covered his losses based on the civil authority provision and that since the mention of virus exclusion was unclear, it should be considered null and void.
The judge countered that the virus exclusion would have applied even if there had been physical damage. This is seen as the first dispositive motion ruling in the U.S. over a suit concerning business interruption insurance coverage because of the COVID-19 pandemic.
Currently, a handful of states are attempting to expand business interruption insurance requirements to cover the coronavirus pandemic. However, it is essential to know that these policies rarely offer coverage for such things.
Even if state legislatures manage to pass bills revising the rules, there is a strong likelihood that they would not be able to withstand a court challenge based on the precedence of the two previously mentioned cases.
Business Interruption Insurance is a type of coverage that safeguards businesses from losses incurred when operations stop due to a disaster. It is never sold as a standalone policy but is often bundled with other types of insurance for business owners.
It covers lost revenue, mortgage payments, loans, taxes, payroll, relocation expenses, and training costs during the restoration period, which begins 48 to 72 hours after a covered event and lasts while repairs are being made, which can be anywhere from 30 days to a year.
It does not cover damaged property, flood or earthquake damage, utilities, undocumented income, and communicable diseases.
Despite these exclusions, most small business owners should consider investing in business interruption insurance if they rely on physical locations or assets that could be damaged by events such as fire, theft, or severe weather.
Business interruption insurance premiums can range from $500 to $3,000. However, the final price is based on factors such as the type of industry, geographic location, revenue range, the scope of coverage, and the choice of insurer.
If you are interested in securing business interruption insurance for your company, you may consult an insurance broker to help you customize your policy according to your needs.
Business Interruption Insurance FAQs
What is business interruption insurance.
This insurance is business coverage business professionals purchase to be able to get business income, expenses, and revenue loss repaid if business operations are interrupted.
Why do business owners need it?
Business interruption insurance is business protection business professionals can use in case business equipment failure or business operation disruption due to a power outage interrupts business income.
How can business owners get business interruption insurance?
Business interruption insurance is business protection that business professionals can get by speaking with business insurance providers and asking questions about how business interruption claims are paid out.
Who can use business interruption insurance?
Anyone who owns a small business or a large company, it is business coverage that applies to everyone in some way to make business property repairs or business equipment replacement easier.
What does business interruption insurance cover?
It covers business income loss after a property loss, business operating expenses if business operations are suspended because of damage to business property, and lost business revenue due to business interruption caused by any intentional act.
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True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.
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Home » Blog » What is Business Interruption Insurance?
What is Business Interruption Insurance?
Business interruption insurance is also sometimes referred to as “business income coverage” or “contingent business interruption insurance.”
Business interruption insurance is typically part of a business owners insurance policy.
In the aftermath of a covered “peril” (e.g. theft, fire, wind, lightning, falling objects, etc.), business interruption insurance can help reimburse covered businesses in two ways:
- Reimbursement for lost income — For example, if a fire (the “peril”) destroys your inventory, business interruption insurance can reimburse you for the lost income sustained as a result.
- Reimbursement for extra expenses — For example, if your business was forced to temporarily relocate due to a fire, business interruption insurance can cover the extra expense associated with your temporary lease.
Perils Covered by Business Interruption Insurance
While business interruption coverage varies, many policies include coverage for lost income and extra expenses incurred by a business due to the following “perils”:
- Mechanical breakdown
“What about business interruption insurance for COVID-19?”
The COVID-19 pandemic has devastated many North Carolina businesses.
Many business owners are seeking to file coronavirus business interruption claims. Business interruption insurance may or may not cover perils such as the coronavirus outbreak.
In certain cases, such as business interruptions caused by government-mandated shutdowns during the COVID-19 pandemic, you may be entitled to compensation under a policy’s “interruption by civil or military authority” / “civil authority ingress or egress” provisions.
All policies are different, however, and if you are considering a claim for coronavirus-related business loss of income or extra expenses, it is best to speak with a coronavirus business interruption lawyer to review your case.
Business interruption compensation may be available for many types of businesses that have suffered loss of revenue or unanticipated expenses due to COVID-19, including bars, restaurants, and gyms and fitness centers , among others.
Like other insurance policies, business interruption insurance has a policy limit, which represents the maximum amount the insurance carrier will pay toward your losses.
Financial losses that extend beyond your policy limit are not covered.
In most cases, business interruption policies have a 48 to 72-hour “waiting period” before benefits kick in, and policy coverage usually extends 12 months from that date (although that duration may be different, depending on your specific policy).
Business Owner Obligations
If you have a business interruption insurance policy and decide to file a claim, the insurance company typically will expect that you take certain steps and precautions to limit further damages.
For example, if your office building was damaged in a severe storm, the insurance company will want you to have taken certain steps to secure the building — such as boarding up broken windows — to prevent future damage.
In many cases, your business interruption insurance company will reimburse you right away for some or all of the immediately necessary repairs.
Have you been denied by your business interruption insurance company due to COVID-19?
If your North Carolina business has suffered a loss of revenue and unanticipated expenses as a result of the coronavirus pandemic, some or all of your COVID-19-related financial losses may be covered under a business interruption insurance policy.
Our North Carolina coronavirus business interruption lawyers can help evaluate your claim for COVID-19-related losses and determine your best legal options.
For a FREE, no-obligation consultation with a North Carolina business interruption claim attorney, please call 1-800-525-7111 or complete the short form below.
The consultation is free, there is no obligation, and you won’t pay any upfront costs or attorney fees unless we win your case and you receive compensation for your claim.
Please call 1-800-525-7111 today and let’s review your COVID-19 business interruption claim.
Riddle & Brantley has been representing North Carolinians who have been denied by their insurance companies for decades and we would love to help however we can.
Call 1-800-525-7111 today to speak with a North Carolina business interruption lawyer today.
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Business Interruption Insurance Explained: Coverage, Claims, and FAQs
- October 23, 2023
The survival of a business in the event of an unanticipated catastrophe is a crucial matter – and it’s not something left to mere chance.
Business Interruption Insurance can be your financial fortress when operations unexpectedly screech to a halt. Join us as we unpack everything you need to know about this vital coverage, explain the process of filing claims, and answer frequently asked questions. Read on to arm yourself with essential knowledge that could save your business from spiraling into a financial nosedive in face of sudden disruptions.
What Is Business Interruption Insurance?
Business interruption insurance , also known as business income insurance and contingent business interruption coverage, is a crucial type of coverage that helps protect businesses from financial losses due to unexpected events, such as fires, natural disasters, or other disruptions that force them to temporarily close or relocate. It provides assistance in replacing income when a covered loss occurs, resulting in the temporary shutdown of the business.
The goal of business interruption insurance is to help businesses recover lost revenue and continue operations as smoothly as possible during times of crisis. By providing financial support during periods of closure or relocation, this insurance policy acts as a safety net for businesses, allowing them to cover ongoing expenses like rent, utilities, payroll, loan payments, taxes, relocation costs, extra expenses, and even training costs after a covered loss.
For instance, imagine a small retail store that experiences extensive damage due to a fire.
The firefighting efforts are successful in extinguishing the flames but leave the premises uninhabitable. As a result, the store has no choice but to temporarily shut down for repairs. Without business interruption insurance, the store would be solely responsible for all the expenses incurred during the closure period. However, with this insurance in place, the policy would provide compensation to cover lost profits during the restoration period and enable the store owner to meet their financial obligations until they can fully resume operations.
Now that we have a clear understanding of what business interruption insurance is and its purpose in helping businesses during times of crisis let’s explore the inclusions and exclusions within this coverage.
Inclusions and Exclusions of Business Interruption Coverage
Business interruption insurance covers various aspects related to financial losses caused by unexpected disruptions.
It typically includes:
Lost Revenue : Business interruption insurance compensates for lost revenue due to closure or limited operations during the restoration period after a covered loss. It helps bridge the gap between regular income and the reduced income resulting from the interruption.
Mortgage/Rent Payments : If a business is unable to operate from its usual location due to damage, business interruption insurance can cover mortgage or rent payments for an alternative space during the restoration period.
Loan Payments : The policy may assist in covering loan payments, ensuring that financial obligations are met even when the business is temporarily closed or unable to generate its usual income.
Taxes : Business interruption coverage may provide funds to help businesses meet their tax requirements during the period of disruption or closure.
Payroll : It helps cover employee wages during the shutdown or limited operations, ensuring that employees continue to receive their salaries despite the temporary setback.
Relocation Costs : In cases where relocation is necessary after a covered event, business interruption insurance can help with expenses associated with moving to a new location.
Extra Expenses : This insurance often covers additional costs incurred for getting the business back up and running after a loss, such as temporary repairs, expedited delivery charges, extra labor costs, and other essential expenses.
While business interruption insurance provides critical coverage, it’s important to note that it also has specific exclusions:
Broken Items : Insurance typically doesn’t cover repairs or replacements for broken items due to a covered event or loss.
Flood or Earthquake Damage : Coverage for flood or earthquake damage usually requires a separate policy in addition to business interruption insurance.
Undocumented Income : Income that isn’t properly recorded on financial records might not be included in the coverage calculations for business interruption insurance.
Utilities Turned Off During Business Closure : If utilities are turned off during a business closure due to damage, they may not be covered under this insurance policy.
Communicable Diseases Causing Shutdown : In some cases, communicable diseases causing a government-mandated shutdown may be excluded from coverage unless specific endorsements apply.
It’s essential to review your specific policy and consult with insurance professionals to better understand the inclusions and exclusions relevant to your business interruption insurance coverage. Understanding the terms and conditions of your policy will help ensure that you have the appropriate protection tailored to your unique business needs.
What is Covered?
Business interruption insurance provides coverage for a wide range of expenses that a business may incur due to a covered loss or disruption. Let’s delve into the specific areas that are typically covered under this type of insurance.
First and foremost, business interruption insurance helps replace lost revenue during the period of restoration. This means that if your business experiences an event like a fire, natural disaster, or other covered peril that forces you to temporarily shut down, the policy will help compensate for the income you would have earned during that time.
In addition to lost revenue, business interruption insurance can also cover essential financial obligations such as mortgage or rent payments. This is crucial because even if your business is not operating, ongoing expenses like these cannot be put on hold. The insurance policy can step in and ensure that these payments are made, providing financial stability during a challenging period.
Loan payments and taxes are another area where business interruption coverage can prove invaluable. When your business faces a significant disruption, it can be difficult to meet these financial obligations. However, with the right insurance coverage in place, you can have peace of mind knowing that these payments will be taken care of.
Furthermore, payroll is an important consideration for many businesses. Business interruption insurance can help cover employee wages and salaries during the restoration period, ensuring that your valued employees continue to receive their income even if your operations are temporarily halted.
Relocation costs may also be covered under certain circumstances. If your business needs to move to a temporary location or find alternative premises while repairs take place, business interruption insurance can assist with expenses related to relocation and setting up operations in the new space.
Extra expenses incurred as a result of the disruption are often included in the coverage as well. This could include costs for temporary storage facilities, rental equipment, or additional staff hiring to expedite the recovery process.
For instance, let’s say you run a restaurant that suffers severe water damage due to a burst pipe. As a result, you need to shut down for repairs and renovation. Business interruption insurance would cover the lost revenue during the closure period, the rent payments, loan payments, taxes, payroll for your employees, temporary location costs (if applicable), and any extra expenses incurred to get your restaurant up and running again.
Now that we have a clear understanding of what is covered under business interruption insurance, it’s equally important to be aware of certain situations and expenses that are typically excluded from coverage.
Some key stats:
- According to a report by the Insurance Services Office (ISO), as of 2020, approximately 34% of small businesses in the USA have business interruption insurance.
- Risk Insurance noted that in 2019, the average payout for a business interruption claim was around $1.36 million.
- As per the findings from a study by Marsh & McLennan , industries such as hospitality and manufacturing which have high risk exposures constitute about 65% of all buyers of business interruption insurance.
What’s Not Covered?
While business interruption insurance provides vital coverage for various scenarios, there are certain exclusions to keep in mind. It’s crucial to understand what may not be covered by your policy so that you can plan accordingly and explore alternative options if necessary.
Some common exclusions from business interruption insurance include property damage caused by events not covered by your policy. For example, if your business is located in an area prone to floods or earthquakes and you do not have separate coverage for these perils, any losses resulting from such events may not be covered.
Undocumented income is another aspect that usually falls outside the scope of coverage. It’s essential to have accurate financial records and documentation of your business income to make a successful claim under business interruption insurance.
Additionally, utility services being turned off during a shutdown due to damage or any other reason may not be covered. This means that if your utilities like electricity or water are disconnected during closure, the policy may not reimburse you for those expenses.
Lastly, communicable diseases causing a shutdown can also pose challenges when it comes to insurance coverage. While recent events have raised awareness regarding pandemics, it’s worth noting that not all policies automatically cover losses due to communicable diseases. Reviewing your policy terms and conditions carefully will provide clarity on this aspect.
It’s essential to thoroughly review your specific policy and consult with your insurer or a professional insurance agent to understand the precise coverage and exclusions relevant to your business. This will help ensure that you have a comprehensive understanding of what is covered and what falls outside the scope of your business interruption insurance.
Estimating Your Coverage Needs
When it comes to business interruption insurance, estimating your coverage needs is a crucial step in protecting your business from financial losses. To determine the appropriate level of coverage, you must consider various factors that contribute to your business’s income and expenses.
Begin by evaluating your business’s historical financial records and projections. Look at past income statements and profit and loss statements to understand your average monthly or yearly revenue. Consider any seasonal fluctuations or trends that might impact your income throughout the year. Additionally, take into account any growth plans or anticipated changes in your business that might affect future profitability.
For example, if you own a restaurant, you might analyze historical performance during different seasons and factor in potential impacts such as holidays or events that could affect customer demand.
Next, consider the ongoing expenses necessary to keep your business running even when operations are disrupted. These can include rent or mortgage payments, utility bills, loan payments, payroll costs, taxes, insurance premiums, and other fixed expenses that continue regardless of whether you are generating revenue.
Let’s say you run a manufacturing company. You would need to calculate not only the costs involved in producing goods but also the overhead expenses like rent for your facility, salaries for employees, raw material costs, utilities, maintenance fees, and any other recurring costs associated with maintaining your operations.
Once you have a clear understanding of both your potential lost income and ongoing expenses during a business interruption period, you can then work on estimating the coverage amount required to protect your business adequately. It is essential to be thorough in this process to ensure that you don’t find yourself underinsured when an unexpected event occurs.
Now that we have discussed how to estimate the coverage needs for business interruption insurance let’s delve into calculating lost income and additional expenses during such disruptions.
Calculating Lost Income and Additional Expense
Calculating lost income and additional expense is a critical step in determining the financial impact of a business interruption and understanding what costs you can claim under your business interruption insurance policy.
T o calculate lost income, you will need to assess how much revenue you would have generated if your business had not experienced the interruption. This involves analyzing past sales data, customer trends, and market conditions that drive your business’s revenue generation. Consider any projected growth or seasonal fluctuations as well.
For instance, if you own a retail store and experience a temporary closure due to a fire, you would estimate the income based on historical sales during the same period in previous years. If there were any special promotions or events planned during the disrupted period that could have influenced sales, take those into account as well.
In addition to lost income, consider any additional expenses your business incurs as a result of the disruption. These could include costs associated with relocating your operations temporarily, renting new equipment or office space, hiring temporary workers, expedited shipping fees for supplies or inventory replacement, or any other extra expenses incurred solely due to the interruption.
Now that we understand how to calculate lost income and additional expenses when considering a business interruption insurance claim, let’s move on to discussing when and how to file a claim.
When and How to File a Claim
Facing a disruption in your business operations can be incredibly stressful, but having business interruption insurance can provide some relief during these challenging times.
So, when and how should you file a claim for business interruption insurance?
First and foremost, it’s crucial to notify your insurance provider of the interruption as soon as possible. Promptly initiating the claims process allows for a smoother resolution and ensures that your coverage begins promptly. Remember to gather all important documentation related to your business’s financials, such as lease payments, payroll expenses, and records of business profits.
It’s important to understand that there may be a waiting period deductible before coverage kicks in. This waiting period typically starts from the date of the incident leading to the interruption. Before you file a claim, make sure you review your policy or consult with your insurance agent to understand the waiting period specific to your coverage.
Once you’ve notified your insurer and collected all necessary documents, submit your claim by filling out the required forms provided by your insurance company. These forms will typically ask for information about the nature of the interruption, details about revenue loss or additional expenses incurred, and any supporting documentation.
Keep in mind that every claim is unique, so it’s advisable to work closely with your insurance provider throughout the process. They can guide you on what specific documents are needed and answer any questions or concerns you may have along the way.
In some cases, especially if the losses are significant or more complex, an adjuster may be assigned to evaluate your claim. The adjuster will assess the extent of the interruption and review all supporting documentation to determine the amount covered by your policy. It is crucial to cooperate fully with the adjuster during this evaluation phase.
Remember that time is essential when filing a business interruption insurance claim. Delays in submitting necessary documentation or failing to comply with procedures outlined in your policy could potentially result in complications or delays in receiving the coverage you are entitled to. Therefore, make sure to familiarize yourself with the specific requirements and deadlines established by your insurance provider.
Now that you understand how to file a claim for business interruption insurance, it’s also essential to be aware of alternative options that could provide financial protection in case of a business disruption.
Alternatives to Business Interruption Insurance
While business interruption insurance can provide valuable coverage during times of disruption, it may not always be the right fit for every business or situation. Luckily, there are alternative options that can help mitigate financial losses. Let’s explore some key alternatives:
Emergency Savings : Having a robust emergency savings fund can act as a buffer during unforeseen interruptions. By setting aside a portion of your profits each month, you can build a financial safety net that can help sustain your business during difficult times.
Line of Credit : Establishing a line of credit with your bank can provide access to funds when needed. This flexible borrowing option enables you to draw on funds up to a predetermined limit, helping cover expenses during an interruption until normal operations resume.
Contingency Planning : Developing a comprehensive contingency plan entails identifying potential disruptions and outlining steps to minimize their impact. This could include having backup suppliers or establishing remote work capabilities, ensuring your business can continue operating even during unexpected events.
Government Assistance Programs : Investigate government programs and resources available in your area that offer financial assistance during times of crisis or natural disasters. These programs may provide grants, low-interest loans, or other forms of support tailored to businesses facing disruption.
Loss of Rent Insurance : If you’re a landlord who relies on rental income from tenants, consider purchasing loss of rent insurance. This type of coverage specifically applies to landlords who lose rental revenue if their property becomes uninhabitable due to a disaster.
It’s important to note that each alternative option has its own benefits and limitations. Assess your business’s specific needs and circumstances to determine which options align best with your goals and provide the necessary level of financial protection.
For instance, a small restaurant owner may find it more practical to build emergency savings and develop contingency plans rather than investing in business interruption insurance due to the nature of their business.
While business interruption insurance remains a reliable choice for many businesses, exploring alternative options can provide additional layers of protection or be better suited to your unique circumstances. Consulting with a financial advisor or insurance professional can help you make informed decisions based on your business’s specific needs and risk profile.
Business interruption insurance is a critical coverage for businesses, offering financial protection in the event of unexpected disruptions that can lead to lost income.
As with any insurance policy, there may be questions and concerns regarding its coverage, claims process, and overall effectiveness. Let’s explore some frequently asked questions about business interruption insurance to provide clarity on this important topic.
What does business interruption insurance cover?
Business interruption insurance helps replace lost business income in case of a temporary closure due to a covered problem like fire or theft. It is sometimes called ‘business income coverage’ and is usually included in a business owner’s policy.
The coverage extends beyond just revenue; it also covers mortgage/lease/rent payments, loan payments, taxes, payroll, relocation costs, and training costs for employees. It aims to ensure that your business can continue operating smoothly even during unforeseen circumstances.
Consider the case of a restaurant that experiences a fire, leading to its closure for several weeks while repairs are made. During this time, the restaurant will likely suffer a significant loss of income. However, with business interruption insurance, the policyholder can receive compensation for the lost income and other covered expenses, allowing them to maintain financial stability during the recovery period.
What are some exclusions to business interruption insurance?
While business interruption insurance provides valuable coverage for various situations, there are certain exclusions that should be noted. Common exclusions include damage from flood or earthquake events, losses associated with undocumented income, utility disruptions (unless caused by direct physical damage), and closures resulting from communicable diseases or pandemics. It’s essential to carefully review your policy and understand any specific limitations before assuming full coverage.
Let’s say you operate a retail store located in an area prone to flooding. If your business suffers damage due to a flood and is temporarily closed, you might assume that business interruption insurance would cover your lost income. However, flood damage is typically excluded from most policies, meaning you may not be eligible for compensation in this scenario.
Which businesses and industries benefit from business interruption insurance?
Businesses that rely on a physical location or assets that could be affected by problems such as fire or theft can benefit from business interruption insurance.
Examples include restaurants, retail stores, salons & spas, dog groomers, yoga studios, and many more. Essentially, any business that relies on continuous operations to generate income should consider obtaining this type of coverage .
Consider the case of a small boutique clothing store. If a fire were to break out and force the store’s temporary closure, the owner would face significant financial challenges without the protection of business interruption insurance. With this coverage in place, however, the policyholder can mitigate the financial impact of the closure by receiving compensation for lost income and other covered expenses.
How is the coverage limit determined for a business interruption policy?
The coverage limit determines the maximum amount the insurance company will pay toward a claim under your business interruption policy. Several factors come into play when determining an appropriate coverage limit. It’s essential to consider the time it takes to get your business up and running after experiencing a problem, the state of your security measures and fire alarms, rental costs for alternative office space during closures, and realistic earnings projections.
For instance, suppose you own a salon that experiences severe water damage due to burst pipes. To repair and reopen your salon, it would take an estimated three months. During this period of restoration and recovery, you would need to cover ongoing expenses like rent for temporary workspace and payroll for staff. By calculating these projected expenses along with anticipated lost income during closure, you can determine an appropriate coverage limit that safeguards your financial stability throughout the recovery process.
How much does business interruption insurance cost?
The cost of business interruption insurance can vary based on several factors. These factors include your industry, the number of employees you have, the desired coverage amount, your business location, and the perceived risk of making a claim. On average, business interruption insurance ranges from $40 to $130 per month or $480 to $1,560 per year. Keep in mind that these figures are general estimates, and obtaining an accurate quote will depend on specific details about your business.
Let’s consider a scenario where you run a small manufacturing company with ten employees. Due to the nature of your industry and the level of risk associated with potential interruptions, it may cost around $80 per month or approximately $960 per year to obtain adequate business interruption insurance coverage. While this is an additional expense for your business, it can provide invaluable protection against unforeseen disruptions that could lead to significant financial losses if not properly insured.
Can I bundle business interruption insurance with other coverages?
Yes, you can! Business owners policies (BOPs) are comprehensive insurance packages tailored for small businesses. They typically bundle general liability insurance, commercial property insurance, and business interruption insurance into one policy. BOPs are recommended for small businesses as they offer convenience and often come at a more affordable price point when compared to purchasing individual coverages separately.
Imagine you own a small bakery. Besides needing business interruption coverage in case a fire damages your commercial kitchen and forces a temporary closure, you also want protection against accidents or injuries that might occur on your premises (general liability) as well as coverage for any property damage (commercial property). Instead of obtaining separate policies for each type of coverage, you can opt for a BOP that includes all three coverages in one package. This approach not only provides necessary protection but also simplifies the insurance process and potentially saves you money.
Obtaining business interruption insurance is similar to having a spare tire in your car. You hope you never have to use it, but it’s there
What expenses can be covered by business interruption insurance?
Business interruption insurance can cover a range of expenses that occur when a business is temporarily unable to operate. These expenses can include payroll, rent or mortgage payments, utility bills, and even the cost of finding temporary accommodations. According to a study conducted by insurance provider Hiscox, the average small business loses around $8,000 per day during a period of interruption, highlighting the importance of having coverage for these expenses.
How does business interruption insurance work?
Business interruption insurance provides financial protection to businesses when they experience a significant interruption in their operations due to a covered event, such as a fire or natural disaster. It helps cover the loss of income and assists in paying expenses like rent, salaries, and loan payments during the period of interruption. Statistics show that on average, businesses take around 9 months to fully recover from a major interruption, highlighting the importance of having this coverage in place to safeguard against potential financial losses.
How do you determine the amount of coverage needed for business interruption insurance?
To determine the amount of coverage needed for business interruption insurance, it is important to consider various factors such as your business’s revenue, expenses, and the potential duration of the interruption. One common method is to calculate the “gross earnings” which includes projected revenue and continuing expenses during the interruption period. Another approach is to analyze historical financial statements and trends to estimate potential losses. It is also essential to review industry benchmarks and consult with an insurance professional to ensure adequate coverage.
Get Business Interruption Insurance For Your Company Today With The Allen Thomas Group
When it comes to choosing a business interruption insurance policy, it’s important to work with a reputable insurance provider like The Allen Thomas Group. They have years of experience in the industry and can help you find the right coverage for your business.
Don’t wait until it’s too late – get a quote today by clicking on the button below and protect your business from the unexpected.
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Business interruption insurance calculation, covid-19 is just one reason why a hard-working entrepreneur would need to use business interruption insurance. more common natural and man-made crises that could require the use of business interruption insurance include fires, earthquakes, tornadoes, hurricanes, and even traffic blockages. less common business interruptions include mold, bacteria, and gas leaks. in one case, a landlord….
COVID-19 is just one reason why a hard-working entrepreneur would need to use business interruption insurance.
More common natural and man-made crises that could require the use of business interruption insurance include fires, earthquakes, tornadoes, hurricanes, and even traffic blockages.
Less common business interruptions include mold, bacteria, and gas leaks. In one case, a landlord could not rent his property after kicking out a tenant who bubbled meth in the bathtub until he had it remediated!
Note: Insurance companies are flat denying these claims causing Lawyers to get involved before policy holders can even negotiate the value of the claim. When lawyers bring these claims in Court, we use professionals such as forensic accountants to point damage.
However, there are specific methods you must use in order to accurately calculate your financial losses and use your business interruption insurance. Let us review them.Table of contents
- First: Projecting Business Results But For the Business Loss Trigger
- Basic Formula # 1: Lost Sales – Expenses Saved As a Result of Not Accruing the Sales (aka “top-down” approach)
- Basic Formula # 2 Net Income + Continuing Expenses + Extra/Additional Expenses = Business Loss (aka “bottom up” approach)
Consider: the length of loss of coverage, consider: policy limits, ppp loans and business loss, contact a business interruption insurance, first: projecting business results but for the business loss trigger.
First, we will need to project what the business results would have been if the even triggering the business loss had never occurred.
Second, we will determine the actual business results during the loss period.
Finally, we subtract the actual business results from the projected business results to determine the loss value.
That means we are looking to see if the business is trending upwards, downwards, or staying the same.
Has the business increased sales over the last three years? Increased net revenue? We want to account for that.
Is the business seasonal? For example, retail businesses obtain most of their sales in a small window of time at the end of the year. We want to take that into account as well.
Documents Needed :
The building block for a business loss calculation is tax returns or net income statements. We are looking for three years of these statements to make sure we are making good projections. Once we have our documents in hand, we can look at the formulas we will use to determine the business loss.
Business valuators and forensic accountants have two formulas they can use to determine the loss.
Basic Formula # 1: Lost Sales – Expenses Saved As a Result of Not Accruing the Sales (aka “top-down” approach)
One way to calculate loss revenue from a business interruption is to determine the difference in sales and then subtracting the expenses saved as a result of not having the sales.
In other words, determine projected sales, subtract actual sales, and then subtract expenses saved as a result of not having those sales.
Basic Formula # 2 Net Income + Continuing Expenses + Extra/Additional Expenses = Business Loss (aka “bottom up” approach)
The other way to determine net income loss is to calculate the projected net income first. Then compare to actual income to determine the net income loss. Then add in all the expenses occurred by the business.
Consider a restaurant. Prior to Covid-19 , it was humming along. Then the restaurant had to shut down 80% of operations. The restaurant owner streamlined his menu in the short term and canceled a significant portion of food deliveries to the restaurant from his supplier.
Each meal served at a restaurant has a food “cost” associated with it that reduces total profitability to the restaurant.
Under the top-down approach, the restaurant calculates what its total sales would have been but for the business loss and then subtracts the expenses saved as a result of not accruing the sales.
Under the bottom-up approach the restaurant calculates what its net income would have been (revenues minus expenses, interest, and taxes), and then adds back the actual expenses incurred.
Under the bottom-up approach, the restaurant can add back not just normal expenses but even the new weird ones that might have been caused because of the actual crisis. On the flip side, historical net losses are accounted for in the bottom-up approach.
The benefit to the top-down approach is the calculation is a bit simpler. The benefit of the bottoms-up approach is it does not treat losses as though they were in a vacuum.
Now that you have an idea on how to calculate your business loss, recognize that insurance policies are written to limit just how much money is paid to you.
Most policies specifically define the length of time that a business can claim a business loss. This is often called the period of indemnity. We have seen these periods as small as 30 days and as large as a year. You will want to check your policy.
Also, recognize that insurers put coverage caps on the amount of coverage the policy offers. We expect most of these claims to be for policy limits.
In the Covid-19 world, approximately 10 percent of businesses have received PPP loans. We understand that insurance companies are going to argue that the PPP money loaned should offset the business loss.
First, consider that these loans are loans. They are unsecured and there are forgiveness grants built into them. But they are still loans and may need to be paid. Borrowed money is not the same as money earned. Loans do not show up on income statements, there are on the balance sheet as they will need to be paid back.
Second, these loans are not going to begin to cover actual losses sustained by the businesses. We fully expect many businesses to suffer losses that are multiples of their loan amounts.
Calculating business income loss requires analyzing your taxes or income statements to project what your business would have earned but for the crisis, and then adjusting for actual expenses paid.
Many business owners can estimate these amounts, but in cases where there must be a lawsuit and business interruption insurance attorneys to get the claims paid, expect the help of a forensic account or business evaluator.
However, most business interruption attorneys will front the costs of these experts, and then seek to have the insurance company pay the expert’s costs later.
Contact us today so we can review your insurance policy even if your claim was denied.
Our attorneys will review your policy to determine if the insurance company acted in bad faith and if you are owed money for your business loss.
Call or text us at 813-365-3512.
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