Business Interruption Insurance
Business interruption insurance (also known as business income insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster. It differs from property insurance in that a property insurance policy only covers the physical damage to the business, while the additional coverage allotted by the business interruption policy covers the profits that would have been earned. This extra policy provision is applicable to all types of businesses, as it is designed to put a business in the same financial position it would have been in if no loss had occurred. This type of coverage is not sold as a stand-alone policy, but can be added onto the business' property insurance policy or comprehensive package policy such as a business owner's policy (BOP). Since business interruption is included as part of the business' primary policy, it only pays out if the cause of the loss is covered by the overarching policy.
Elements of Business Interruption Insurance
There are four critical elements to business interruption insurance:
- It is only triggered in three limited circumstances:
- 1. There is physical damage to the premises of such magnitude that the business must suspend its operations.
- 2. There is physical damage to other property caused by a loss that would be covered under the company’s insurance policy, and that damage totally or partially prevents customers or employees from gaining access to the business.
- 3. The government shuts down an area due to property damage caused by a peril covered by the company’s insurance policy that prevents customers or employees from gaining access to the premises.
- Even after a covered event, most policies have a waiting period of several days before business interruption coverage comes into play. Once it is in play, the coverage is not retroactive to the day of the event.
- Coverage is limited. Specifically, after the waiting period expires, coverage is provided for lost net income, temporary relocation expenses (designed to reduce overall costs), and ongoing expenses such as payroll that enables businesses to continue paying employees rather than laying them off.
- Coverage is not open-ended. Coverage is available only for as long as it is necessary to get the business running again, and usually not longer than 12 months. In addition, the business is required to prove all business interruption losses to its insurer.