What Is Business Interruption Insurance?

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Business interruption insurance covers lost revenue if a business temporarily closes because of a covered loss, such as a warehouse catching fire or inventory being stolen. While you recover from your losses, business interruption coverage will pay for operating costs, such as relocation expenses, payroll and commercial loan payments, usually for at least 30 days. Business interruption insurance is not sold as a standalone policy but can be added to a commercial property insurance policy or bundled into a business owners policy.

An estimated 30% to 40% of small business owners carry business interruption insurance according to the National Association of Insurance Commissioners. Find out how it works and if it’s right for your business.

How Does Business Interruption Insurance Work?

When a business has to temporarily close, business owners may struggle with making ends meet if there is no or reduced cash flow. If it’s a covered closure, business interruption will step in to help pay for operating expenses, like rental payments, loan payments, taxes, employee costs, relocation expenses.

We’ve listed some common types of perils below, which can include a fire burning down the warehouse, a burst pipe flooding the office or a tree falling on your building.

  • Fire
  • Lightning
  • Windstorm
  • Riot
  • Explosion
  • Damage by aircraft
  • Theft
  • Smoke
  • Vandalism
  • Falling objects
  • Weight of ice or snow
  • Burst pipes
  • Electrical short-circuits
  • Freezing
  • Volcanic eruption
  • Hail
  • Damage by vehicle
  • Government-mandated closure

The portion of revenue your insurer will cover is based on the coverage duration and your operating expenses (e.g., payroll, rent payments, loan payments, working capital). Coverage duration usually starts at 30 days and business owners can pay more to extend it to several months. Depending on your policy, you may be subject to a waiting period deductible of usually 30 days — coverage will kick in after this time frame.

If your business needs to close for repairs, let your insurer immediately. Your policy may have a deadline for filing a claim.

What Does Business Interruption Insurance Cover?

While your business is temporarily closed, business interruption insurance will cover several types of operating costs:

  • Lost revenue
  • Monthly lease, rent or mortgage payments for the business
  • Payroll
  • Loan payments
  • Marketing and advertising
  • Temporary relocation expenses
  • Training costs for employees learning new equipment or systems
  • Extra expenses related to your business being interrupted
  • Government-mandated closure
  • Taxes
  • Utilities

What Isn’t Covered?

Business interruption insurance does not protect your income for all types of closures. Some exclusions include:

  • Flood, mudslide or earthquake damage.
  • Undocumented income
  • Closure due to epidemics or disease
  • Pandemics or viral outbreaks
  • Broken items and property damage (such as broken glass)
  • Voluntary closures

Are Business Income Insurance and Business Interruption Insurance the Same?

Business income insurance and business interruption insurance are often used interchangeably. Another term insurers may use is contingent business interruption coverage. All three of these terms offer the same type of coverage and will replace your income if your business unexpectedly closes because of a covered loss.

Who Is Business Interruption Insurance Best For?

Businesses that require expensive equipment and machinery or have inventory and important documents are more likely to maintain business interruption coverage. Below, we list common types of enterprises that could benefit from purchasing this policy add-on:

  • Brick-and-mortar retail stores
  • Restaurants
  • Bakeries
  • Hair salons
  • Barber shops
  • Yoga studios
  • Dog groomers
  • Accountants
  • Coffee shops

If an event like a fire or theft could potentially jeopardize your business, or if your business is in a location that is susceptible to bad weather patterns, interruption insurance is critical to secure your peace of mind.

How Much Does Business Interruption Insurance Cost?

The cost to add business interruption insurance to your commercial policy will vary by policyholder and will depend on various factors, including your operating costs, coverage limits and industry (see list below). Fortunately, business interruption insurance is usually bundled into business owner’s policies, which can cost, on average, $3,125 per year according to The Hartford.

Coverage

The amount of coverage needed will significantly impact the cost of business interruption insurance. Imagine how a sudden disaster — like a fire —could affect your operations. Calculate how long it would take to get your operations up and running after a disastrous event like a fire.

Next, determine your revenue within that time frame. Take into consideration what it would cost to relocate your operations, your anticipated profits, inflation, advertising, rent or mortgage payments, staff costs and more. Your policy’s coverage limit is essential or otherwise, you would have to absorb financial losses outside of your coverage limit.

Payroll

A business with 50 employees will likely pay more for business interruption coverage than one that has five. Business interruption insurance can potentially cover payroll for up to a year. Therefore, the more employees you have and the longer the coverage duration, the higher the premium.

Industry

Some types of businesses have higher risks for property damage, so they will have to pay more. Restaurants, for example, may have to pay higher premiums than a small accounting office due to a higher risk of kitchen-related fires.

Revenue

While your business is closed, business interruption insurance will pay a portion of the revenue you would ordinarily generate. The higher the revenue your business normally brings in, the higher you can expect to pay in premiums to help maintain your business operations.

Location

If your business is located in an area that is known for severe weather events or exposure to perils will have to pay higher premiums. Businesses that are more vulnerable to vandalism, theft and other crime will likely pay higher premiums due to their higher risk exposure.

Prior Claims

Filing multiple insurance claims in your recent claims history will flag you as a high-risk policyholder, which can result in higher premiums. Customers with a minimal or clean claims history will usually enjoy the lowest rates.

Buy Interruption Insurance for Your Business

How To Get Business Interruption Insurance

Business interruption insurance isn't generally sold as a standalone policy. The easiest way to get business interruption insurance is as a rider to your commercial property insurance or to buy a business owners policy (BOP).

Businesses with annual profits below $5 million or fewer than 100 employees should highly consider a business owner's policy, which is an insurance package that bundles business interruption coverage with other basic protections, like general liability and commercial property coverage.

More sophisticated enterprises may need to buy standalone commercial property insurance and add business interruption coverage to their policy. Almost all business insurance carriers sell business owners’ policies or commercial property insurance.

How Long Does Business Interruption Insurance Last?

The duration of your business interruption coverage is called the restoration period, which usually starts at 30 days and can be extended up to a year or more. However, be mindful of the waiting period, which is the time after a covered loss before your business interruption coverage steps in. During this time, you will not be covered for operating expenses.

Preparing for Business Interruption

Business owners who plan for business interruption can save significant costs if an unexpected disruption occurs. Having a contingency plan in case your business needs to temporarily shut down gives you a better chance for a full recovery after a catastrophic event. Here are a few tips to keep in mind:

  • Business interruption plans should consider the business’s physical location.
  • Business owners should keep accurate financial records to help them determine how much business interruption coverage they need.
  • Seasonal businesses should strongly consider business interruption coverage. Closing your business during the few months you make the bulk of your annual revenue can be crippling. Worst case, your business may be forced to close permanently.

FAQs

How is business interruption calculated?

One way to calculate business interruption insurance is by multiplying the time your business operations will be shut down by your operating expenses (e.g., payroll, loan and rent payments). A successful claim allows you to operate as if no loss had occurred. 

Is business interruption insurance required in every state?

Business interruption insurance is not required and is optional coverage. You can usually purchase it as an add-on to a commercial property insurance policy or buy a business owners policy that includes this coverage.

Does my company need business interruption insurance?

Most business owners need business interruption insurance to help replace any income they lose if they have to close their business temporarily. Restaurants, hair salons and brick-and-mortar retail stores are common types of businesses that could benefit from business interruption insurance.

Key Takeaways

  • Business interruption insurance replaces lost income if you have to temporarily halt operations due to direct physical loss or damage from a covered event, like a fire burning your warehouse and inventory.
  • Business interruption insurance covers operating expenses, relocation costs, taxes, payroll, rent or mortgage payments and loan payments.
  • Business owners are not covered if the business shuts down due to a pandemic or virus.
  • The restoration period is the duration that business interruption insurance will cover lost revenue and can often range from 30 to 365 days.
  • Business owners can purchase business interruption insurance with their business owner's policy or commercial property insurance.

Shopping around is essential for getting the cheapest rate for the commercial insurance coverage you need. SmartFinancial compares multiple quotes from different insurance carriers to match you with a policy based on your business needs and budget. Just enter your zip code below and answer a few questions for quotes in your area.

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