What would you do if your business was interrupted by a natural disaster or some other type of emergency? Or, in the case of a lightning strike frying all of the essential equipment needed to operate, your business had to close its doors for an extended period of time? What then? If you don’t have business interruption insurance coverage, you could be out of luck. This is why it’s critical for business owners to take out a business income coverage policy.
What is Business Interruption Insurance?
Business income insurance, also called business interruption insurance, is one of the types of business insurance that can help your business survive by protecting it from catastrophic financial loss in cases of interruptions or closures. In the event of a covered peril like fire or falling objects, it shields entrepreneurs from lost income and other related costs related to the disruption they cause.
The time that the insured company is shut down and repaired is what is known as the restoration period. This period typically has a time restriction, which is usually 30 days. Fortunately, business owners can often extend the restoration period included in their policy for an additional cost.
Why You Should Take Out a Business Income Coverage Policy
No one knows when an emergency will happen, but that doesn’t mean businesses shouldn’t be prepared. If something does go wrong and your business is forced to close, you could lose a lot of money. This problem is especially true for small businesses, which often don’t have the same financial cushion as their larger counterparts.
The business insurance benefits that this type of insurance brings can help you:
- Replace lost income: If your business is forced to close, this policy will help to replace the net business income you would have made if you were open for business.
- Cover additional expenses: If you have to relocate your company because of a covered emergency, this policy will help pay for the extra costs associated with that move.
- Cover the cost of moving to a new or temporary location: If you have to temporarily or permanently relocate your business due to a covered event, this policy can help pay for the costs associated with doing so.
- Pay for additional expenses related to the interruption: Business interruption coverage can also help pay for things like the loss of business records and temporary employee costs.
- Training costs: Business interruption insurance can help pay for the training cost for personnel to learn how to operate new equipment.
Bear in mind the lost net income amount of a business an insurance company considers is based on its financial records. Your insurance company will likely ask you to provide P&L statements, sales records, payroll records, tax returns and any other information that declares your income and expenses.
What Expenses are Covered by Business Income Coverage?
The loss of business income and the operating expenses that result from a covered emergency are what business income coverage is designed to cover. But it’s important to note that not all expenses related to your interrupted business operations are covered by this type of policy.
Policies can differ, but some common examples of operating expenses covered by this kind of insurance include:
- Expenses used for temporary or permanent relocation.
- Wages for temporary employees.
- Loss of business records.
- Extra expenses to keep the business running.
- Taxes and routine bills.
- Payroll expense.
- Mortgage, lease and loan payments.
What Does Business Interruption Insurance Cover?
Covered natural or manufactured disasters largely depend on the policy’s terms, but they generally include damage from:
A fire can quickly destroy a business’s property, equipment and inventory. This disaster could leave the building uninhabitable and damage or destroy goods just before they were scheduled to ship to customers. Business income insurance coverage can assist with the loss of business income due to the slowdown or temporary closure of the business. In addition, if the business needs to move because of a fire, the coverage can also help with the cost of the move.
High winds can knock down trees or power lines, causing extensive damage to your business property. Often, business interruption insurance works together with commercial property insurance to pay for repairs. For instance, the insurance for the commercial property could pay for roof repairs. In contrast, business interruption insurance can help you recoup any lost income resulting from the business closure due to the wind severely damaging the roof.
If something falls on your business, like a tree, hail, boulder or section of another building, business income insurance can pay for the loss of income until you make repairs and open back up. However, in the case of someone else’s equipment, part of a building, vehicle or aircraft falling or crashing into your building, the other person’s general liability insurance company will cover the legal fees and damages, which could include the loss of income during a shutdown.
A lightning strike can cause physical damage to a business owner’s property in several ways. First, it can cause a fire to break out at your business or fry up your wiring. Second, it can damage critical equipment. Meanwhile, property insurance can help with the damaged assets, and business interruption insurance can help with your lost income if you are forced to close or move because of lightning-related damage.
The type of insurance coverage that applies to theft will depend on whether the person works for you or not. If they don’t work for you and their thievery affects your business, then business interruption insurance can help cover the costs. If an employee commits fraud or theft, then fidelity bonds protect the company from financial losses. A Business Owners Policy (also known as a BOP) covers physical damage to the property and its contents during the commission of crimes like theft and robbery.
Civil unrest is considered a covered event if you are forced to halt operations or limit hours due to it. Business income insurance will help you recover lost income in these circumstances. Therefore, if there’s a riot, looting, vandalism or other types of civil unrest in your area that causes a shutdown, this type of policy could reimburse you.
What’s Not Covered by Business Interruption Insurance
There are circumstances that insurance for business interruptions generally won’t cover. For example, business interruption coverage doesn’t pay for broken items or damaged assets that result from a covered event (commercial property insurance policies usually cover this); flood or earthquake physical damage, which is covered by a separate policy; undocumented income that isn’t listed on your company’s financial records.
In addition, the coverage doesn’t pay for the following:
- Losses caused by terrorism or war.
- Economic loss when a communicable disease causes business interruptions or closures.
- Utility services that are usually shut off when a business is under repair.
- In cases where the civil authority clause is used. This happens when a civil authority, such as a local state or federal governmental entity evacuates or prohibits access to an area after a natural disaster occurs. In these cases, civil authority coverage takes precedence over business income insurance, and the clause will outline whether or not the government will reimburse you for your lost income.
- Workers’ compensation. You will need to purchase workers’ compensation insurance separate from interruption insurance for employees injured on the business premises or working for you off-premise.
Does Business Interruption Insurance Cover Covid-19 Shutdowns?
It’s a hotly debated topic, but the insurance industry’s stance is that there is generally no coverage for pandemics. However, that fact hasn’t stopped firms who think their losses should be covered and are pursuing lawsuits against insurance companies. Still, there are insurance companies that cover businesses affected by the coronavirus.
Check the wording of your policy to see if it a pandemic is explicitly excluded or included. You can also talk to someone at your insurance company to see if they can include this type of coverage.
How Much Does Business Interruption Insurance Cost?
So, how much does business insurance cost? Prices for business interruption insurance vary, depending on factors, such as:
- The size of your company.
- Type of industry.
- Number of employees.
- How much coverage you need.
- Your deductible.
- The location of your business.
- Value of your inventory.
- How often you file claims.
- Whether you have other policies with the same insurer.
The businesses’ gross earnings are also a factor that insurers will consider when setting rates. As a general rule, the higher the gross earnings, the more coverage you’ll need. Your policy should have enough coverage to replace all of your lost income, as well as your ongoing expenses.
That being said, Insureon gives a good benchmark for what to expect when you ask for this type of business insurance quote. The small business insurer states that a business owner can expect to pay between $40 and $130 monthly, or $480 and $1,560 annually for the policy. If you’re not sure how much coverage you need, it’s best to talk to an insurance agent.
How to Choose the Best Small Business Interruption Coverage
As you can see, it’s essential to get the best business interruption coverage for your needs and to help your business recover—there is simply too much at stake to leave things to chance.
Here are some factors to consider when choosing the best coverage from your insurance company:
- Your business interruption insurance should cover your business’s gross earnings. This will help you to be able to continue making a profit after an unexpected event. An insurance agent can help you calculate your business income for insurance.
- Make sure that you have enough coverage and the right kind of coverage to rebuild your business if it’s damaged.
- Consider adding extra expense coverage for property damage and loss of income.
- If you do your business primarily online or depend on computers to run your company, decide if you need coverage from a casualty insurance company instead of having interruption insurance (or if you need it in addition to interruption insurance). A casualty insurance company can provide you with the right kind of insurance coverage to guard against cybercrime, website damage and other similar liabilities.
Also, it’s a good idea to find out the following:
- Does the insurance company you are considering offer the best rates and service?
- Does your insurance company bundle the different business insurance coverages you need to cover losses?
- Does the insurance company pay claims quickly, or are there long wait times?
How to Get Business Income Insurance
The following steps outline how a business owner should go about getting their business income insurance policy:
1. Consult with a business attorney: There are many gray areas when it comes to business interruption insurance. A business attorney can help you understand your policy language and help you understand if any extra expense or certain event is covered.
2. Discuss insurance options with your accountant: Accountants can help you understand the financial impact of a business interruption and what level of coverage is necessary to protect your business.
3. Talk with your peers and compare: As a business owner, it’s important to get an idea of what other small business owners are paying for similar coverage, especially if they conduct business in the same area where your business is located.
4. Meet with insurance agents: A reputable, licensed insurance agent can help you find the best policy for your business and ensure that you are fully protected in the event of a business interruption.
5. Do your research: Understand the ins and outs of all business insurance policies. Then, compare rates from several insurance companies before making a decision.
6. Bundle your policies: You can talk to your insurance company about bundling different business insurance policies together to save money. For instance, a standard business interruption policy can be bundled with a property insurance policy. Or both of those policies and others can be bundled as part of a business owner’s policy (BOP).
7. Assess risk: Look at all the risk factors for your business and compare them to your coverage limit. You may need to purchase additional coverage if a disaster is likely to happen and exceeds your coverage limit. For example, if your business is in an area that is prone to flooding, you may need to purchase additional flood coverage.
8. Reassess every year: Review your policy annually to ensure that you have the best protection in place for your business.
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