The Basics About Business Interruption Insurance
Business interruption insurance, also frequently referred to as business income coverage, helps protect against lost income and extra expenses caused by perils like theft, fire, wind, falling objects, or lightning.
Extra expenses often covered under a BI policy include:
- Employee Wages – Helps your business continue paying employees during restoration.
- Extra Expenses – Added expenses above and beyond standard fixed costs, including renting a temporary location, hardware/tech/furniture replacement, leasing equipment, paying overtime, and hiring additional employees.
- Fixed Costs – Regular costs of doing business.
- Loans – Helps businesses make monthly loan payments during restoration.
- Profit – Based on your business’s past financial records, the insurance reimburses you for lower-than-expected earnings.
- Taxes – Allows businesses to continue paying taxes and avoid related penalties.
- Temporary Location – If you need to move to a new business location temporarily.
- Training Costs – Covers employee training for replacement equipment or software.
In some instances, coverage may apply when a civil authority (e.g., state, local, or federal governmental entity) requires a business close due to secondary damage from a nearby company. This is known as Civil Authority Ingress/Egress.
In most cases, coverage is provided as part of a Business Owner Policy (BOP), which includes commercial property, general liability, and data breach insurance. However, you can occasionally purchase it as a standalone product.
Together, these coverages can help provide a cushion of support while you’re unable to meet customer demand.
Your Business Income Insurance Restoration Period
Business interruption insurance doesn’t provide indefinite coverage in the event of a claim. In the policy language, there’s a clause that outlines its “restoration period:” the length of time that your policy will pay out while you restore your business.
Before coverage kicks in, you’ll also have a waiting period that lasts between 48 and 72 hours. This time begins on the date following your restoration period and ends when your business returns to its former condition.
The Insurance Information Institute (III) reports that the standard restoration period is 30 days, but you can often increase this up to 12 months using an endorsement (more soon).
Because every policy is different, you must read through your documentation to better understand its waiting period and restoration period details. Otherwise, you could lose coverage at a critical moment when getting your business back on its feet.
Are There Any Business Interruption Insurance Exclusions?
The Insurance Information Institute indicates that business interruption insurance typically excludes coverage for:
- Broken goods (e.g., glass)
- Flood and earthquake
- Income not listed on your business’s financial records
- Bacteria, viruses, and other infectious diseases, including pandemics
Can You Improve Business Interruption Coverage Using Endorsements?
In short, yes. Depending on the carrier, you’ll likely have several business interruption endorsements from which to choose. Here are a few of the most common:
Dependent Properties – Provides coverage for non-owned properties where a covered claim stops or reduces their earnings. These include suppliers, buyers, providers, and drivers (aka leader locations).
Civil Authority – If coverage isn’t automatically provided, as discussed above, you may be able to re-add it via endorsement. Either way, coverage typically doesn’t exceed two weeks. Furthermore, it’s important to emphasize that some carriers require a physical loss to occur before coverage kicks in.
Utility Services – Provides coverage if your business’s essential services are disrupted by a covered loss, including electric, gas, or water that’s provided by a public or private utility company. Generally, carriers offer two utility endorsements; one that addresses the time element and another that covers direct damage (e.g., windstorm).
What Are Some Examples of Business Interruption Insurance in Action?
BI Insurance Example 1
Fire damages your business and its attached warehouse, so you can no longer distribute your products or have any of your admin staff onsite. Business interruption coverage could help replace your lost product, continue paying suppliers, and cover costs of moving to and operating out of a temporary location.
BI Insurance Example 2
A powerful storm rolls through town, and its high winds cause extensive damage to your business, including ripping off a portion of the roof and breaking most windows. You have to purchase supplies, rush to the location quickly, and board up the windows and damaged roof sections.
In this example, the insurance company would reimburse you for immediate repairs, in addition to the standard coverage provided under a business interruption insurance policy.
How Much Does Business Interruption Insurance Cost?
Business interruption insurance costs can vary widely, depending on factors like:
- Coverage amount
- Previous claims
- The size of your business – The more employees you have, the higher rates you’ll likely pay.
- Your business’s industry – Businesses with higher risk exposures, such as a restaurant, will pay higher rates than lower-risk options, such as a retail store.
- Location (e.g., a company located along the Gulf Coast might pay more than one not subject to hurricanes or other natural disasters)
With these details in mind, premiums typically range between $500 and $1,500 per year, although this number can exceed $10K.
Who Should Consider Business Interruption Insurance?
The fact of the matter is that most business owners should think about purchasing business interruption insurance. Instead of wondering if you should buy it, it’s more a question of how much coverage you should buy.
Some tips to keep in mind:
- Determine the appropriate amount of coverage by using your gross earnings to project future profits.
- Even if you rent your office space, business interruption insurance can help pick up some coverages not provided by your landlord’s insurance.
- Central alarms and sprinklers can help reduce the damage caused by many of the perils covered under this insurance. Depending on their carrier, they could also reduce what you pay for coverage.
- If you live in a competitive market, keep in mind that it could take you longer than expected to find a temporary location while your business is restored.
Where Can You Turn for More Information About Business Interruption Insurance?
The team at IHS Insurance Group boasts decades of combined experience, so we’re chock full of tips when it comes to business interruption insurance!
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