Buying the right business insurance is important to ensure the smooth running of your business. Any disastrous event or unexpected situation can come up at any time and can lead to the temporary closure of your business. As a result, you might have to shut your business down for repairs and maintenance. The good news is your income won’t be lost if you have signed up for business interruption insurance.
Also called business income insurance, the coverage offers financial protection against your income loss due to covered damage that led to business closure for a short period. It can be property damage due to a fire or natural disaster. Or, it can be theft. Suppose a huge tree falls on your property or near your office because of a heavy storm. You have to close your business until the repair team handles the issue. Fortunately, for all the days your business stayed shut, you can seek compensation from your insurance provider if you have business interruption insurance and it covers property damage.
Likewise, the insurance coverage for the temporary closure of a business due to government regulations, such as temporarily closing a specific road for repair work or a new construction project. Business interruption insurance is often an add-on, which is a part of your comprehensive business insurance coverage.
Understanding the Coverage
A business interruption policy covers all the operational expenses that a business bears when it remains closed. Whether or not you will be reimbursed depends on your property coverage. If the cause of the business closure is covered by your business insurance, you can claim business interruption compensation.
The total reimbursement amount is calculated based on your past financial records. Your insurance provider calculates the amount of reimbursement plus the interruption period. Usually, it is 30 days, but it can be extended up to 360 days. It is calculated from the day the event took place till the day your property gets back to normal condition after all the repair and maintenance.
Here’s what the coverage typically includes.
- The income you have lost for the days when your business remained shut. As mentioned previously, it’s calculated based on the previous year’s profit.
- Operating cost
- Employee training, especially if a business has to lease or buy new machinery due to damage.
- Rental or lease payment for your business
- Employees payroll, especially if you might lose your employees due to business closure. Your employees will be paid the regular salary for the number of days your business stayed closed.
- Taxes are applicable even if the business is not generating any income. These will be covered by your insurance provider.
- Cost of relocating to a new place (if you need to move to another location)
- Loan payment that’s due every month. In case you aren’t able to meet the mortgage, loan, or rental payment due to loss of income, your insurance provider will cover that.
Before you sign up for the business interruption insurance, make sure you go through the exclusions, as well. Here’s what the coverage doesn’t include.
- Property damage due to earthquake or flood (you need a separate insurance policy for the damages that occur due to these natural disasters).
- Utility bills, as electricity is turned off when your business is closed
- Your business remains closed because of an infectious disease
- Income that’s not mentioned in your financial records
Unfortunately, business interruption insurance did not cover the income loss due to the COVID-19 pandemic. As it falls into the communicable disease category and doesn’t cause any physical damage to the property, any virus or infectious disease resulting from that will not be covered.
Who Should Get Business Interruption Coverage?
Business interruption coverage is an add-on that every business, especially those with equipment and heavy machinery, should consider. If there’s a risk that your business can be affected by any calamity and your property or assets can get damaged, business interruption coverage is for you. Restaurants, small retail stores, spas, and yoga centers are a few business types that can benefit from the interruption coverage.
Note that business interruption coverage comes with a limit. It decides the maximum an insurance company will accept for a business interruption claim. It’s important to go through the coverage carefully and ask about the coverage amount before signing up for the insurance, as you may not want to pay out of pocket for the damages that your policy doesn’t cover or for expenses that exceed the maximum coverage limit. Here are a few factors to consider when choosing a business interruption insurance.
- How soon can you have your business up and running if a problem arises?
- Do you have all cameras, security practices, and other protocols in place?
- Do you have rental space in your neighborhood in case you decide to move your office to a new location because of the longer waiting period?
Note that interruption coverage is available in different types and each serves different purposes. For instance, you choose a plan that covers all kinds of business closures that take place due to government-related work, or the one that compensates for all your expenses incurred during the closure period. Make sure you check your financial records to determine your net earnings as well as operational expenses for the month so that it’s easier to determine how much you will need if your business shuts down for a month.
How Much Does It Cost?
The total you will pay in premium for business interruption coverage depends largely on the type and size of your business, coverage plan, employees in your firm, and other factors. The premium cost also depends on where your business is located and your risk of filing a claim for property damage or business closure.
Usually, this add-on costs around $40 to $130 a month. As mentioned previously, you don’t need to buy business interruption insurance separately, as it comes bundled into general liability and commercial property insurance. Still, it’s advisable to compare the cost before making any decision.