If we’ve learned anything, it’s that you can never take for granted that it will always be “business as usual.” Natural disasters can force your business to close down, disrupting sales and cash flow. Business interruption insurance is designed to protect the company you’ve worked hard to build in the event of a covered event.
What is Business Interruption Insurance?
Business interruption insurance is insurance coverage that replaces any business income lost due to closure or decreased operations resulting from a disaster. Whether you need to close due to a fire or electrical storm, you can rest assured knowing that your business protection insurance will cover your bills and employees during an unexpected closure. A business interruption policy can protect your company from financial losses associated with unknown risks.
What does Business Interruption Insurance Cover?
Sometimes called business income coverage, business interruption insurance helps protect your business against lost income after a covered peril affects your business, including property damage. This coverage typically covers fire, theft, falling objects, and lightening, etc. While the current global pandemic is not currently covered in basic business interruption, you can purchase pandemic insurance as an extension of your plan.
Most business interruption insurance policies cover the following items:
- Lost profits: coverage will provide reimbursement for profits that would have been earned had the unfortunate event not occurred (based on prior months’ performance).
- Fixed costs: due to reduced or interrupted business, such as operating expenses and other costs incurred for doing business.
- Temporary location: in the event that your physical location is left unusable, some policies cover the costs associated with moving to and operating from a temporary business location.
- Damaged property costs: coverage may help to replace any equipment or machinery damaged during the covered event.
- Commission and training costs: in the wake of a disaster, your company may need to replace machinery and retrain personnel on how to use the new machinery.
- Extra expenses: coverage may provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the business gets back to its pre-disaster operations.
- Employee wages: business interruption insurance covers employees’ wages to help you retain your staff during your closure.
- 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 due monthly and insurance can help your company make those payments even when you are not generating income.
Business Interruption Insurance Exclusions
Business interruption insurance does not cover everything. Common policy exclusions include:
- Undocumented income – Coverage is based on previously documented income, so be sure to document all of your income.
- Utilities – During closures, utilities are typically turned off and they are not covered unless your business moves to a temporary location.
- Partial closure losses – Coverage does not go into effect unless your business is completely interrupted.
- Losses from closures not caused by covered events – Typically closure due to earthquakes, flood, and pandemics are not covered under business interruption insurance. They require their own policy.
- Closures due to power outages – Power outages are common and usually restored quickly. Most closures caused by storms and power outages are not covered under business interruption policies.
How Much Coverage Do I Need?
Business interruption insurance typically has a coverage limit. This limit established the maximum amount your insurer will pay toward a covered claim. Any financial loss that exceeds your coverage limit is the responsibility of the policy holder. Working with your insurance professional, you’ll determine the exact amount of coverage needed to protect your business.
Your coverage limits will take the following into consideration:
- Approximately how long would it take to get your business back up and running after a disaster?
- If you rent your office space, how well protected is the building?
- Are the building fire alarms and sprinkler systems functional?
- How quickly would it take for you to find a suitable temporary location?
- What are your daily operating and employee wages?
- What is the value of your equipment and machinery?
How Much Does Business Interruption Insurance Cost?
The price of your business interruption insurance can vary depending on a variety of factors. For example, if your business is in an area more prone to natural disasters, such as hurricanes or tornadoes. It also depends on your industry. For example, if your business is a restaurant you may be more prone to fires than if your business is in real estate.
The cost of your policy will vary based on the following factors:
- Amount of coverage
- Number of employees
- Prior claims experience (if you’ve had to file any previous claims)
Reducing Loss After Business Interruption
Understanding how business interruption coverage will protect your business can help you be more prepared in the event of an unforeseen natural disaster. At Petra, our team of insurance professionals is here to help you protect your interests – both personal and professional.