Business Interruption Insurance: What It Does and Doesn’t Cover

Lucy Lazarony
November 3, 2020

Business interruption insurance, also known as business income insurance, is a type of business insurance that covers the loss of income that a business suffers following a disaster. This income loss may be related to the closing of the business due to the disaster or it may be due to the rebuilding process after the disaster takes place.

Property insurance covers the physical damage to the business. Business interruption insurance covers the profits that would have been earned if not for the disaster. Business interruption insurance fits well with all kinds of businesses since its aim is to put a business back in the same financial position as before a disaster strikes. Let’s take a closer look at business interruption insurance.

Works With Other Insurance Policies

Business interruption insurance can be added to a business property insurance policy. It also can be added to a business owner’s policy (BOP). Other insurance coverages in a BOP include commercial property insurance and general liability insurance. Business interruption insurance makes for a good companion policy to these insurance policies, covering the loss of income that a business suffers following a disaster. A bundle of insurance policies in a BOP are often chosen by small to midsize businesses. The policies are less expensive than if they were purchased separately.

What’s Covered With Business Interruption Insurance?

A number of business items are covered by business interruption insurance. These include profits that would have been earned based on previous months’ earnings, operating expenses, the costs of moving and operating from a temporary location, commission and training costs and extra expenses that allow the business to keep operating while the property is being repaired. Other items covered by business interruption insurance include payroll expenses, mortgage, rent and lease payments, taxes and loan payments.

What’s Not Covered With Business Interruption Insurance?

Business interruption insurance doesn’t cover broken items resulting from a covered event or loss. Business interruption insurance doesn’t cover flood or earthquake damages, which are covered by separate policies. Undocumented income is not covered by business interruption insurance. That means that any income not listed in your business financial records is not covered by business interruption insurance. Utilities are not covered by business interruption insurance because they are usually turned off when a business closes due to damages. And pandemics, viruses and communicable diseases such as COVID-19 are not covered by business interruption insurance.

What Causes a Business to Be Interrupted?

Covered perils for business interruption insurance include theft, fire, wind, falling objects and lightning. All these

things could cause an interruption and loss of income to your business. The two most common causes of business interruption are fire and flood. So keep those two perils in mind when planning and selecting your policy.

Civil Unrest

In rare instances, business interruption insurance can apply if a civil authority shuts down a business due to physical damages to a nearby business. This shutting down of the business results in a loss of income for the company. This type of business interruption coverage typically does not exceed two consecutive weeks.

Period of Recovery

Business interruption policies limit the period of recovery for a business. This period generally runs from the date of the suspension of business operations to the date of completion of repairs for the business.

Business interruption insurance offers a specific period of recovery, a maximum period of coverage and offers a maximum recovery per month.

With business interruption insurance, profit and loss statements and tax returns are used to calculate the lost profits of a business. Industry and local trends are also considered.

Extra Expenses Coverage

Business interruption insurance covers extra expenses, which are anything beyond the normal day-to-day operating expenses and are necessary to keep a business afloat. Examples of extra expenses include renting a temporary office space while the original office space is being repaired, the replacement of hardware, technology and furniture, paying overtime for employees or hiring more employees and leasing equipment.

How Much Does Business Interruption Insurance Cost?

The cost of business interruption insurance depends on a number of factors. They include the industry of your business, your number of employees and the amount of coverage that you choose. Costs also vary based on your location and your risks for covered perils. For example, if you live in an area with an increased risk of hurricanes, you may have to pay more for your business interruption insurance.

How Much Business Interruption Insurance Should I Sign Up for?

Here are some important questions to ask before signing up for business interruption insurance. How long will it take to get your business back and running after a loss? How well protected is the office building where you rent your office space? Are sprinklers and fire alarms up to date in your office building? Is comparable office space available in your area or would it take weeks to find a new office space?

Weigh these questions when determining the amount of business interruption insurance that you need for your business. A good rule of thumb is to use gross earnings and business projections to estimate future profits and determine the right amount of business interruption coverage.

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