What Is Business Income Insurance?

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Business income insurance is an optional insurance plan that covers operating expenses and payroll if your business temporarily closes due to a covered property loss. For example, this coverage would step in if a restaurant closes due to a fire and isn't generating any cash flow. During this time, business income insurance can pay for payroll, rent, utilities and more until your business is back up and running.

Business income insurance is not sold as a standalone policy and is usually an add-on to an existing commercial insurance policy. Keep reading to learn how business income insurance works and if it’s right for you.

Is Business Income Insurance Required?

Many small businesses can benefit from investing in business income insurance, but it is not mandatory. However, if your business has to shut down because of a covered hazard, like a fire or vandalism, then this optional coverage will help pay for specific financial losses.

Business owners will have to determine what their business income insurance policy will cover, and what is exempt and calculate their overall business income. This lets your insurer know how much is needed to cover rent, payments, utilities, payroll and more.

The actual cost of your business income policy depends on how much coverage you need, where your business is located and the type of business you have.

As a business owner, you should ensure that your policy limits are sufficient to cover your company for more than a few days. After all, it can take weeks or even months for a business to recover after a covered loss.

Business Income Insurance Limitations

Business income insurance can protect you from certain situations — the keyword being “certain.” Not all losses will be insured. Consider the two scenarios below:

First scenario: If a heavy windstorm collapsed your business’s roof and sparked a month-long closure for repairs, your business owner policy would cover the property damage portion and your business income could help with lost revenue linked to the business closure.

Second scenario: If a windstorm closed a supplier’s location and you lost business as a result, your business income insurance would not step in. The damage did not take place on your premises and would not qualify for coverage.

It’s essential that business owners fully understand how they’re covered and under what circumstances. If additional coverage is needed to protect your operations, let your insurer know.

What Does Business Income Insurance Cover?

Business income insurance covers loss of income if your business needs to close suddenly. This coverage can also protect your business from a slowdown after it reopens. For example, sales may still be lower than usual even after reopening your bakery following a week-long shutdown. Types of coverage in a business income insurance endorsement include:

  • Lost profits: If you suffered significant financial loss because your business wasn’t operable during a profitable period — like the holidays — then your insurance will help recover lost profits.
  • Rent or mortgage: If you’re paying rent or mortgage on a commercial building, you’re still responsible for making those payments, regardless of the current status of your business. Business insurance provides some financial cushion on your rent or mortgage payments until your business is back up and running.
  • Temporary relocation: Business income can cover relocation costs to transition into a temporary office or building.
  • Payroll: Business income insurance can cover employee salaries and wages, taking care of your workers while your business is temporarily closed.
  • Loan payments: If your business is closed and there’s no cash flow, you may not have enough funds to make your next business loan payment. Business insurance can help cover these payments so you do not default on your loan.
  • Taxes: If your business needs to close its door temporarily before taxes are due, your insurance can cover these costs.
  • Utilities: Although your business is closed, you’re still responsible for paying some of the utility costs, like electricity and water. Business income insurance can help ensure you stay on top of these bills.
  • Marketing and advertising: If you paid a marketing company to run a campaign, but you recently needed to shut down your business for repairs, business income insurance will cover advertising costs until you can make a profit again.

What Isn’t Covered?

As with many insurance policies, members are not insured against losses caused by government seizure, acts of war and nuclear hazards. Other events that business income insurance typically excludes might include:

  • Floods
  • Earthquakes
  • Mudslides
  • Severe weather
  • Epidemics and diseases
  • Downed power lines
  • Undocumented income
  • Losses caused by uncovered perils
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How Does Business Income Insurance Work?

Business income insurance works together with commercial property insurance when it comes to physical losses.

Commercial property insurance covers the cost to repair or replace damaged equipment. Meanwhile, business income insurance helps replace lost income while key equipment is undergoing repairs.

When an unmitigated disaster suddenly causes your operations to shut down temporarily, you still need to pay bills, utilities, loans, rent or mortgage, payroll and much more. If this happens to you, all you need to do is file a claim through your insurer to get these expenses covered by your business income coverage for one month or more.

Before filing a claim, you must know what your policy will or will not cover. That way you can focus on what is covered and maximize your payout. You will also need proof or documentation when filing a claim, including your past payroll expenses, lease payments and a record of your business’s profits. Never wait before you file a claim — you’ll want to do this as soon as possible since you will likely face a crunch in cash flow while your business is temporarily closed.

Most business income policies have a waiting period deductible instead of a dollar deductible. For example, coverage may not start until 30 hours after the damage occurred, meaning that any losses during the 30 hours would not be included in your coverage. Your policy should have clearly stated terms regarding your waiting period deductible.

Who Can Benefit From Business Income Insurance?

If you have a brick-and-mortar business that sells a product or service, you will likely see great benefits in buying business income insurance. Contractors, restaurant owners and small business owners would all experience devastating financial losses if their place of business were damaged and had to close for repairs. Business income insurance can provide at least some financial relief until the business returns to normal operations.

How Long Does Business Income Coverage Last?

Business income insurance has a restoration period, which is how long your policy will help cover expenses and lost profits while your operations are being restored. Standard policies will provide coverage for 30 days and it can be extended up to 365 days depending on your policy. However, keep in mind that there may be a waiting period after you file a claim. Typically, this waiting period is 48 to 72 hours and the restoration coverage will apply after this period. 

How To Get Business Income Insurance

Business income coverage can help small businesses protect themselves, and it’s easy to get as part of another insurance plan.

Small to mid-size businesses of 100 employees or fewer, or with an annual income below $5 million may add business income coverage to their business owner’s policy. This policy offers basic protections, like commercial property coverage and general liability insurance

Larger businesses may require stand-alone commercial property insurance to ensure coverage limits are sufficient. Many policies already include business income insurance, so check your policy first before adding it.

FAQs

Should my small business have business income insurance?

Small business owners should consider business income insurance to defend against lost revenue due to unexpected property losses. That way, they're covered for lost profits if their business has to close due to key equipment being stolen, their office suffering a fire or some other type of covered loss.

Is business income insurance the same as business interruption?

Business income insurance is also called business interruption insurance — both help small businesses against financial losses due to suspended business operations when a covered event occurs. 

What happens if I don’t have business income insurance?

Business owners without business income insurance may experience severe financial losses that they may not be able to recover from. Unless you have funds in reserve for paying bills, loans and payroll while your business is not generating any cash flow, your best bet is to invest in business income insurance. 

Key Takeaways

  • Business income insurance helps cover lost revenue, payroll, relocation and more when a business has to temporarily close due to a covered loss.
  • Business income insurance covers lost revenue when the business closes due to covered perils, such as damages caused by fire, windstorm, vandalism and theft.
  • A restoration period is how long the insurer will cover a business’s lost income until it is operational again and is typically 30 days but can be longer.

Business owners interested in saving money may benefit from shopping around. A bare-bones business insurance policy will not be able to protect you if an unexpected event occurred, like theft or smoke. If you don’t have money on hand to keep your business running for weeks or months while repairs happen, you may lose your business. SmartFinancial’s free service can help you better navigate the business insurance marketplace. Just enter your zip code below to compare commercial insurance rates in your area. 

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