Business Interruption Insurance: What is Covered and is it Necessary?
In short, business interruption insurance covers your business in the event that you are no longer able to function normally due to a natural disaster or similar event. For example, if a hurricane damaged your office building, business interruption insurance could cover the expenses of new equipment, moving to a new facility, and any potentially lost income based on historical records. Unfortunately, many small business owners are not familiar with business interruption insurance. Not only are they unfamiliar with its benefits, but they don’t know whether a claim is able to be covered by their policy if the need arises. 
Small business owners operating in certain areas of the country will find this coverage almost a necessity, because of its broad scope and forgiving nature.
Understanding Business Interruption Insurance
Business interruption insurance provides coverage for the loss of business income due to a covered event. The premiums for this insurance, including any additional costs, can be deducted as ordinary business expenses. However, the payout is only made if the cause of the income loss is covered in the underlying property/casualty policy. The amount payable is typically determined based on the past financial records of the business.
The coverage provided by business interruption insurance continues until the end of the business interruption period, as specified in the insurance policy. The standard period is usually 30 days, but it can be extended up to 360 days by adding an endorsement to the policy, as stated by the Insurance Information Institute.
In most cases, the business interruption period is defined as the time from when the covered event occurred until the damaged property is physically repaired and restored to its pre-disaster condition. Additionally, there may be a waiting period of 48 to 72 hours before the coverage becomes effective.
What is covered by the business interruption insuranc?
Coverage provided by business interruption insurance typically includes the following aspects:
1. Profits: The policy will reimburse the business for the profits it would have earned during the affected period, based on its previous months’ performance.
2. Fixed costs: This includes the operating expenses and other costs incurred by the business in its day-to-day operations.
3. Temporary location: In case the business needs to relocate temporarily due to the interruption, some policies cover the costs associated with moving and operating from a different location.
4. Commission and training costs: If the interruption requires the replacement of machinery or retraining of personnel, the insurance may cover these expenses.
5. Extra expenses: Beyond the fixed costs, the insurance will reimburse reasonable expenses that enable the business to continue operating while recovering from the interruption.
6. Civil authority ingress/egress: If the government mandates the closure of business premises due to the interruption, resulting in financial loss, the insurance can provide coverage. This includes closures due to curfews or street closures related to the event.
7. Employee wages: To prevent the loss of employees during the shutdown, coverage for wages is crucial. It helps business owners meet payroll obligations even when the business is unable to operate.
8. Taxes: Despite the disaster, businesses are still obligated to pay taxes. Tax coverage ensures that the business can fulfill its tax obligations on time and avoid penalties.
9. Loan payments: Monthly loan payments can become a burden during an interruption. Business interruption coverage can assist in making these payments, even when the business is not generating income.
Here are the main points to remember:
1. Business interruption insurance provides coverage for lost income when a business is unable to operate due to physical damage or loss caused by events like fires or natural disasters.
2. This type of insurance includes various coverages such as business income coverage, extra expense coverage, contingent business interruption coverage, and civil authority coverage.
3. Business interruption insurance also covers operating expenses, temporary relocation costs, payroll, taxes, and loan payments.
4. In certain cases, this insurance can apply if a business is forced to close due to physical damage to a neighboring business caused by a civil authority, resulting in a loss for the affected firm.
5. It’s important to note that standard business interruption insurance does not provide reimbursement if a business is closed due to a pandemic. Even some all-risk insurance plans have specific exclusions for losses caused by viruses or bacteria.
Let us help you bind any of the following coverages:
- Business Liability Insurance Package Policy. Often referred to as a Business Owner Policy or “BOP,” this General Liability package policy protects your company in the event a client is injured on your premises, or if you or one of your employees causes an injury or property damage at a client’s location. Learn more…
- Professional Liability Insurance . Professional Liability or “Errors & Omissions” Insurance provides coverage in the event you are legally obligated to pay for economic damages to your client or a third party allegedly caused by your negligence, error or omission in the performance of your professional services. Learn more…
- Workers’ Compensation Insurance. Required in many states, Workers’ Compensation Insurance provides medical and disability coverage for company employees in the event of a work-related illness or injury. Learn more…
- Employment Practices Liability Insurance . EPLI insurance provides the protection you need should one of your employees allege any number of employment practice violations. These violations include age, race or gender discrimination, wrongful termination and sexual harassment. EPLI is essential coverage for today’s small service business. Learn more…
- Umbrella Liability Insurance . Umbrella or “Excess Liability” Insurance provides you with an extra layer of protection in the event you have large or multiple claims that exceed your General Liability, Commercial Auto or Employment Practices Liability policies. Learn more…
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