What is Business Interruption Insurance?
Business interruption insurance is a kind of insurance that helps protect a business if something bad happens that stops the business from running normally for a while. It gives the business money to make up for the money it loses during that time.
Why Businesses Need It
Businesses need this type of insurance because unexpected things can happen that mess up how the business usually works. This could be stuff like a fire or flood damaging the building, important equipment breaking down, or a big storm stopping deliveries and shipments. When these kinds of problems happen, the business might have to close for a bit to fix things. And while it’s closed, it’s not making the money it normally does. That’s where business interruption insurance comes in handy.
How Business Interruption Insurance Works
This insurance kicks in when a business suffers a “covered loss”. That means something happens that the insurance policy says it will pay for. Often, business interruption coverage is part of a bigger property insurance policy the business already has.
When making a claim, the business has to show how much money it usually makes and how much it thinks it lost because of the interruption. The insurance company looks at the business’s financial records like income statements and projections to figure out how much to pay.
What Business Interruption Insurance Covers
Business interruption insurance can cover a bunch of different costs and losses that happen when a business can’t run normally:
Lost Income
The main thing this insurance covers is the income the business loses while it’s dealing with the problem. This is based on what the business would likely have made if everything was running as usual.
Operating Expenses
Even if the business is closed, it might still have bills to pay like rent, utilities, and taxes. The insurance can help cover these costs during the interruption.
Temporary Relocation
If the business needs to move to a temporary location while repairs are being made, the insurance can pay for moving costs and rent at the new spot.
Payroll
The business might need to keep paying employees even when it’s not making money. Business interruption insurance can help make payroll so the business doesn’t lose valuable workers.
Loan Payments
If the business has loans it needs to pay back, the insurance can help cover those payments during the interruption period so the business doesn’t fall behind.
Taxes
The business still owes taxes even if it’s not bringing in income. The insurance helps ensure the business can pay its taxes on time.
Training Costs
If the interruption is due to a key piece of equipment breaking down, the business might need to train employees on a new machine. Insurance can cover those training costs.
How Long Coverage Lasts
Business interruption policies define a “period of restoration” which is the length of time that the insurance will cover losses. This is the reasonable amount of time needed to repair damage or get the business running again. It might be a few weeks or many months, depending on the situation. The policy will specify the maximum period of coverage.
Extended Business Interruption
Some policies also include extended coverage that kicks in after the business reopens. This helps cover losses that continue because customers haven’t fully returned yet. Extended coverage usually lasts 30 to 90 days beyond the restoration period.
What isn’t Covered
It’s important to know that business interruption insurance doesn’t cover every possible loss. Here are some common exclusions:
Broken Items
If equipment breaks down due to age or lack of maintenance, rather than a covered event, the insurance probably won’t pay to replace it. Businesses need separate equipment breakdown coverage for that.
Undocumented Income
The insurance company bases payouts on the business’s financial records. If any income isn’t on the books, the insurance won’t replace it. This is why it’s crucial for businesses to keep detailed, accurate records.
Utilities
If the interruption is due to a citywide power outage or utility problem, business interruption insurance usually won’t cover it. Businesses need a special endorsement or separate utility interruption coverage.
Partial Closures
The insurance only pays if the business shuts down completely in most cases. If the business stays partially open, even at reduced capacity, it might not qualify for benefits.
