How Does Business Income Insurance Work?

What You Should Know About Business Income Insurance

Business insurance‘s goal is to help protect your company against unforeseen—and potentially devastating—property and liability losses.

But what happens if a fire (as but one example) occurs and you can’t serve your customers, or pay your distributors or employees? Without business income insurance in place, a scenario like this could prove to be a disaster for your livelihood.

Fortunately, business income insurance is easy to obtain and typically affordable. To help ensure you have all of the information you need, I’ve outlined the specific coverages provided by the insurance, standard exclusions, and optional coverages, depending on your needs.

Let’s begin with the basics.

What are the Basics When it Comes to Business Income Insurance?

If your business must temporarily close or reduce operations, whether wholly or partially, due to a physical loss caused by a covered peril, business income insurance (aka, business interruption insurance) could temporarily replace your lost net income while you get back up and running.

In most instances, you can’t purchase business income insurance by itself. Instead, it typically comes rolled together with property damage and liability coverages under a business owner policy (BOP).

Which Coverages Does Business Income Insurance Provide?

Despite its name, business interruption insurance doesn’t only cover income (i.e., profits). It can also help cover fixed operating expenses, including payroll, rent, and utilities.

The insurance doesn’t kick in until your business is suspended for a specific time (known as a waiting period), which will be outlined in your policy jacket. Often, this isn’t longer than 48 to 72 hours.

Furthermore, this suspension must have been caused directly by a covered peril, and to property used in the course of business.

Period of Restoration

Once your policy’s business income insurance provision kicks in, you enter what’s known as the Period of Restoration, which the International Risk Management Institute (IRMI) defines as:

“The period of time that begins immediately after the direct physical loss and ends on the earlier of the date when the property should be repaired, rebuilt, or replaced with reasonable speed and similar quality, or the date when business is resumed at a new permanent location.”

Suppose the current period of restoration won’t be sufficient to complete repairs. In that case, business owners can usually purchase an optional endorsement that extends the restoration period in 30-day increments, up to a maximum of 720 days.

What Doesn’t Business Income Insurance Cover (i.e., Exclusions)?

While business interruption insurance is designed to protect businesses against accidents and disasters beyond your control, it’s not intended to cover economic risks, poor business decisions, less-than-stellar company management, economic slowdowns, decreased profits due to a changing marketplace, and weather events that might close your business but don’t cause physical damage.

Furthermore, your commercial policy will list exclusions or specific circumstances where it doesn’t provide business income insurance. For example, while the peril of fire is generally covered, flood and earthquake aren’t, which means you would need to purchase a separate policy or endorsements.

Can You Add Endorsements to Business Income Insurance?

Like standard home or auto policies, most carriers allow you to endorse—or add coverage—to your commercial policy, generally, and business income insurance, specifically.

Of course, adding optional coverage will increase your premium. However, the exact amount will vary depending on the carrier, your industry, your business’s location, annual revenue, and the number of employees. Here some of the most common:

Extended Business Income Coverage – Also referred to as Extra Expense Coverage, this endorsement extends income coverage to the period after a business has resumed operations, but still hasn’t reached its pre-claim revenue. In many instances, business owners can choose the length of this coverage, with longer terms increasing premium accordingly.
Service Interruption – What happens if the utility lines (e.g., power, water, sewer, telephone, transmission, and related plants, substations, and equipment) to your business stop working? If the cause of loss is covered under your policy, this endorsement could help cover your operational losses.
Contingent Business Interruption (CBI) – On the other hand, if one or more of your direct suppliers or customers (aka “receivers”) experiences a loss caused by a covered peril, which then reduces your business income, this endorsement could deliver coverage. In some instances, you might be able to also extend coverage to your business’s indirect or second-tier suppliers.
Leader Location (Attraction Property) – As a simplistic example, let’s say you own a shipping store in the same shopping center as a flagship grocery store operated by a national chain. It goes out of business, which significantly decreases foot traffic and slashes your revenue. If this endorsement is attached, your lost profits could be covered, since you don’t own the leader location.
Interruption by Civil or Military Authority – If a government or civil authority prohibits you from accessing your business due to nearby physical damage or destruction (and also a peril covered under your policy), you could be compensated for lost income. A perfect example of this is the recent wildfires across much of the Western United States.

Would You Like to Know More About Whether or Not You Need Business Income Insurance?

You already understand your business’s operations. You can now apply this understanding to whether or not you need business income insurance and how it might apply to a loss.

Do you need additional assistance? Do you have questions that need to be answered? The risk professionals at IHS Insurance Group are here to walk you through the process and ensure you get maximum coverage at the lowest prices.

Need a FREE Quote or have questions regarding commercial insurance? Please fill out our quick GET A FREE QUOTE form, and an agent will get back to you at your convenience!

We look forward to speaking with you today!

Michael Steele