By Priyanka Prakash, JD
Business interruption insurance is both backward- and forward-looking in terms of coverage. It covers income that you’ve already lost from a disaster, but it also covers the things you’ll need to keep your business operating and recover. Covered events include vandalism, fire, and some natural disasters. Business interruption insurance can be purchased as part of a business owner’s policy or added on to commercial property policy.
Imagine if you suddenly had to close down your business tomorrow, and you had no idea when you’d be able to get it running again. It’s pretty scary for a small business owner to face such a thing, especially if you (or your employees) depend on your business for a livelihood. But fires, vandalism, storms, and other events can strike unexpectedly.
Fortunately, you don’t have to live in fear of this happening. Business interruption insurance is a type of small business insurance that can help you stay on your feet even if your company is hit by a disaster. This insurance can replace the income that you lose during a slowdown or shutdown, allow you to continue paying yourself and your employees, and cover operating expenses until you’re back in business.
Do You Need Business Interruption Insurance?
Business interruption insurance (BII), also called business income coverage, replaces lost income and pays for operating expenses when events beyond your control force your business to slow operations or shut down. This can be vital to a business’s continued success, but only 35% of small businesses actually have business interruption coverage, according to the National Association of Insurance Commissioners.
Many small business owners forego business interruption insurance, assuming that their standard commercial property insurance or general liability policy will suffice. Commercial property insurance will repair or replace the property that’s damaged or stolen. However, it won’t cover lost income or future expenses—which can be essential to keep your business going after a disaster.
If you have a brick-and-mortar business, you’re most in need of business interruption insurance because you heavily depend on your store and the physical assets inside it. If you need to close down a portion or all of your shop, you clearly lose potential customers. Home-based and online business owners have less of a need for business interruption insurance, but should still consider their situation. Most homeowners' policies won’t cover lost business income. And although online businesses might have their own physical assets, business interruption insurance can still help if a supplier in your supply chain is affected by a disaster.
You can’t buy business interruption insurance on its own. You either add it on to commercial property insurance or buy it as part of a business owner’s policy (BOP). A BOP combines general liability and property insurance in one policy and is more affordable than buying each type of coverage on its own.
What Does Business Interruption Insurance Cover?
Business interruption insurance is both backward- and forward-looking in terms of coverage. It covers income that you’ve already lost from a disaster, but it also covers the things you’ll need to keep your business operating and recover.
Here are some of the things that business interruption insurance covers:
Lost income: This includes the estimated profits you would have made if your business hadn’t experienced a disaster.
Payroll costs: The insurance will ensure that your employees get their paychecks even if disaster hits your business.
Business loan payments: If you miss payments on any business loans, you could end up paying interest or penalties. Business interruption insurance lets you keep up with loan payments.
Taxes: Business interruption insurance gives you the money needed to cover your small business taxes, even if your regular income sources are interrupted.
Relocation costs: You can claim insurance benefits if you need to temporarily move your business while the original location is being repaired.
Lease/mortgage payments: Business interruption insurance will let you keep paying your lease or mortgage payments. Your landlord’s insurance likely doesn’t cover tenants, so you should have your own business interruption insurance.
Fires, storms, riots, vandalism, and theft are examples of events that would trigger business interruption insurance. Floods and earthquakes usually require separate commercial flood insurance or earthquake insurance.
Your commercial property insurance and business interruption insurance are two separate policies, but they work together. Commercial property insurance covers the repair or replacement of damaged property, and business interruption insurance makes sure that your business can keep operating despite the financial losses that the property damage might cause.
What’s Not Covered by Business Interruption Insurance
Business interruption insurance is a very specific type of coverage designed to keep a business on its feet when it’s recovering from a disaster or unexpected situation.
Business interruption insurance usually doesn’t cover:
Utilities: If your business premises are rendered completely unusable, you should call the utility provider to stop service, so most insurance companies won’t cover utility costs.
Floods and earthquakes: This requires separate commercial flood insurance or earthquake insurance.
Direct property damage: Commercial property insurance insures your business’s belongings. Business interruption insurance is for the ensuing loss of income and expenses.
Employee injuries: Business interruption insurance will help you pay your employees’ wages. However, to insure against physical injuries or illnesses that happen while working, you need workers' compensation insurance.
Liability: Business interruption insurance is not a form of liability insurance, which means that it won’t cover you for lawsuits arising from any property damage or bodily injuries that your company causes.
Voluntary closures: It shouldn’t come as a surprise that voluntarily closing your business doesn’t allow you to claim any insurance benefits.
Seasonal slumps: Seasonal slumps or natural business trends are also not something that an insurance company will cover.
In some cases, your business might be harmed indirectly by property damage down the supply chain. According to P.J. Miller, partner, vice president and chairman of the board at Wallace & Turner Insurance, “Online and, to a lesser degree, in-home businesses could actually be dependent on off-premises, non-owned locations being insured, whether it’s a storage unit or out of state from a company that supplies or ships the goods you’re selling. There’s business interruption insurance if, for example, your loss is due to the fire that destroyed the warehouse/manufacturing plant that is possibly your sole supplier.”
For example, say you have a retail wine shop in Portland, Oregon, that imports wines from a wholesale supplier in Napa, California. A fire in Napa forces the supplier to close down for several weeks, disrupting your supply of wine and slowing down your sales. If you have appropriate coverage in your business interruption insurance policy, you could claim benefits for lost income.
What’s the Cost of Business Interruption Insurance?
Business interruption insurance can only be purchased as an add-on to a commercial property policy or as part of a business owner’s policy (BOP). The average cost of a BOP is $1,191 per year, according to the business insurance marketplace.
The cost of a BOP and your business interruption insurance depend on:
Amount of coverage and policy deductible
Business location: Location in an area that’s prone to natural disasters will increase premiums.
Business size: Businesses with larger premises take longer to rebuild and are costlier to rebuild.
Type of business: A business like a restaurant with many physical assets will pay more than an online business.
Business’s claims history: Having a clean claims history could earn you lower premiums.
Safety measures to protect your business premises: Having a sprinkler system, security cameras to deter looters, or other safety mechanisms could lower your premiums.
How Much Business Interruption Coverage Do You Need?
Obviously, a big factor that affects your cost is the amount of insurance coverage you’re looking to get. In order to calculate how much business interruption coverage to buy, you first need to figure out how much you stand to lose in a worst-case scenario—if a disaster hits your business and leaves it completely unusable.
Here’s how to calculate how much business interruption insurance you need:
Calculate your business’s projected income. Estimate your business’s annual income for the coming year, and divide your estimate by 12 to get projected monthly income.
Calculate how long it would take to get your business running again. This is called the period of restoration. For instance, if your business was completely destroyed, you would have to call an insurance adjuster and appraiser to appraise the losses, an architect to design a new building, and a contractor to construct a new building. You might have to relocate while you wait for the new building to be ready. This period of restoration could take several months, depending on the size of your business.
Calculate lost income and operating expenses during the period of restoration. Since you know your monthly income, add up how much income you’d lose during the period of restoration. You should also write down your monthly expenses for that time period, such as employee wages, loan and rent payments, and taxes.
Keep in mind that the amount of money you’ll receive from the insurance company for each claim is based on records of your business income and expenses, so you should have an effective business accounting software or system.
According to Cate Steane, founder of Make It Happen Preparedness Services, “Having a BII policy is useful only if you have current, accurate documentation of your business revenues and expenses. Having a good bookkeeper and having your financial records on the cloud is critical to the successful pursuit of business interruption claims.” If there are disagreements about the amount of loss you experienced, the insurance company will call in an appraiser.
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