Business Interruption Insurance

Business interruption insurance (also known as business income insurance) covers the loss of income that a business suffers after a disaster. The income loss covered may be due to the 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. In contrast, the additional coverage allotted by the business interruption policy covers the profits that would have been earned. This extra policy provision applies 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. Still, it can be added to 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's primary policy, it only pays out if the overarching policy covers the cause of the loss.

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.

See Also

Business Interruption Insurance, also known as Business Income Insurance, compensates for income lost when a business cannot operate as usual due to damage caused by disasters such as fires, floods, or mandatory evacuations. This coverage is designed to put a business in the same financial position it would have been in if no loss had occurred, helping to cover operating expenses, payroll, lost profits, and costs associated with operating from a temporary location. It is often a part of commercial property insurance policies but may require specific conditions for activation, such as physical damage to the premises causing the interruption. Understanding the terms, coverage limits, and the indemnity period is crucial for business owners to ensure adequate protection.

• Commercial Property Insurance: Discussing insurance coverage that protects commercial buildings and personal property owned by a business, of which business interruption insurance is often a part.
• Risk Management: Covering strategies and practices for identifying, assessing, and prioritizing risks to minimize, monitor, and control the probability or impact of unfortunate events.
• Disaster Recovery Planning: Explaining the process of creating a document that details how a business will recover from unexpected events that cause significant disruption.
• Business Continuity Planning (BCP): Discussing the development of strategies for preventing and recovering from threats to a company, ensuring that personnel and assets are protected and able to function quickly in the event of a disaster.
• Liability Insurance: Covering a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims.
• Supply Chain Risk Management: Explaining the process of managing the risks involved with the supply chain, including logistical problems, supplier or partner failures, and disruptions.
• Insurance Claims Process: Discussing the procedure that follows the filing of an insurance claim, including assessment of the claim, determination of coverage, and payment.
• Financial Planning for Businesses: Covering the task of defining a business’s financial strategy, including considerations for insurance to protect against potential income loss.
• Catastrophe Modeling: Explaining the process of using computer-assisted calculations to predict the losses that could be sustained due to a catastrophic event.
• Regulatory Compliance: Discussing the need for businesses to be aware of and take steps to comply with relevant laws, regulations, and guidelines, including those related to insurance coverage.

Further Reading

• Business Interruption Insurance: 8 Terms to Help You Understand What is Covered -Marsh
• Business Interruption Insurance: What It Will -- and Won't -- Cover -Entrepreneur