Business Interruption Insurance: What It Covers, What It Does Not

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What is Business Interruption Insurance?

Running a business is difficult; it is truly not everyone’s cup of tea. Moreover, things get all the more challenging without the right insurance policies. Business interruption insurance, often referred to as contingent business interruption coverage or company income insurance, is one of the most crucial yet often disregarded types of insurance that every entrepreneur needs. If a firm has a covered loss, such as property damage, and is temporarily unable to operate, it may assist in recovering lost revenue. In this blog, we will delve into the A to Z of business interruption insurance, its benefits, needs, etc.

 

Business Interruption Insurance – The Definition

For every enterprise, certain things are always out of control. Even if you put your heart and soul into your venture and keep meticulous business records and nail the best practices, some uncontrollables can potentially wreak havoc on your enterprises, leading to an interruption. In such a context, business interruption insurance comes to the rescue.

Simply put, a business interruption insurance can be defined as a policy that protects an enterprise financially in case it has to close down due to an unexpected problem that is covered by the policy. It can help alternate the income you lose if you cannot temporarily open your venture after a covered loss.

For example, just imagine that a natural disaster, such as a hailstorm, damages your store and you have to close it for a week or longer for repairs. How will you substitute the lost revenue for the said period? Well, if you have opted for business interruption insurance, it will cover the cost of the lost income while you restore your store. The policy can also help cover extra expenses, such as renting a satellite office while you refurbish your store. Furthermore, civil authority such as a government-mandated road closure that causes a temporary shutdown of the firm may be covered by business interruption insurance.

 

The Technical Nitty-gritty of Business Interruption Insurance

Now that we have touched upon the underlying premise of business interruption insurance, let us check out some of its technical nitty-gritty.

  • Business interruption insurance is not sold as a separate policy. It is either added to a property or casualty policy or a part of a comprehensive package policy.
  • The premiums of the insurance are tax-deductible, just like ordinary entrepreneurial expenses.
  • The amount payable to your business is dependent on past financial financial records.
  • The insurance coverage usually lasts till the end of the business interruption period, which is determined by the insurance policy. The standard policy is 30 days but you can extend it up to 360 days with an endorsement.
  • For the successful payout of a business interruption policy, the event that caused the loss, such as the natural disaster or accident, must be covered under your commercial property insurance policy. For example, if your enterprise had to close down because of vandalism, fire, or hail damage, you are covered. But, if the temporary business closure happened because of an earthquake or other accidents, you are not covered unless you have opted for additional coverage that safeguards against those risks.

 

What Does Business Interruption Insurance Cover?

Business interruption insurance usually covers the following –

  • The revenue your enterprise would typically make if the business was open
  • Mortgage, rent and lease payments for the space your business operates from
  • Loan payments that have to be made during the recovery phase
  • Taxes – monthly or quarterly
  • Employee payroll
  • The cost incurred to train employees to use replacement equipment
  • Relocation costs in case you had to move to a new temporary location due to physical damages

Besides the aforementioned situations, you can find business interruption insurance policies that provide extra expenses coverage, such as the cost of renting a temporary space, outfitting that temporary space, or spending extra money to pay contractors overtime to move repairs faster.

 

What Does Business Interruption Insurance Not Include?

Business interruption insurance usually does not cover the following –

  • Items broken due to a covered event or loss
  • Business interruption caused by an earthquake or flood, which mandates a separate policy
  • Undocumented income that is not a part of your financial record
  • Utilities, as they are usually turned off when the business closes due to damage
  • Communicable diseases that cause a shutdown of operations

 

How Much Coverage Do You Need for Business Insurance?

Moreover, every business interruption insurance has a coverage limit. It is the proportion of coverage you choose to have if you experience a loss. Of course, it can be very difficult to figure out how much business interruption insurance you need. Leveraging your gross earnings and predictions to anticipate future profits and choose the appropriate level of coverage is a solid general rule of thumb.

Also read: Is business insurance tax deductible? Is business insurance required by law?

Keep in mind that you will be responsible for covering any additional expenditure out of your own pocket if your business interruption charges beyond the coverage maximum you choose.

Some questions can help you understand the amount of business interruption insurance you need are –

  • Do your business’ buildings have fire alarms and sprinklers that are updated?
  • How does it take your organization to recuperate after a physical loss or damage?
  • If you suffered a covered loss, do you think you could find another feasible location in your area to house your business temporarily?

 

What Is the Cost of Business Interruption Insurance?

There is no one-size-fits-all paradigm when it comes to the cost of business income coverage. It can depend on a lot of factors, such as –

  • Number of employees
  • Amount of coverage
  • Industry and more

Likewise, the cost you will be dispensing on the insurance also depends on your location and the risk of the covered peril or disaster.

Also read: Do I need business insurance if I’m a sole proprietor?

For instance, if your venture is located in an area that is susceptible to yearly hailstorms, your cost of business interruption insurance may spike up.

 

Wrapping It Up

So, there we have it, a crisp overview of what a business interruption insurance is. It is an excellent choice for entrepreneurs who might be at the risk of closure due to property damage. If you are a small business owner, then this policy can be vehemently beneficial.