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.
The Bottom Line
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.