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2020 and the COVID-19 pandemic have shown us just how hard it is to predict and prepare for events that can potentially force businesses to close their doors, at least temporarily.
Even without taking the pandemic and ensuing shutdowns into consideration, events such as fires, vandalism, and theft affect thousands of businesses each year, giving them no choice but to shut down their operations in order to recover from these unforeseen occurrences.
When such an event damages your business property, the insurance policy that you (hopefully) have purchased to deal with such circumstances is a commercial property policy. Property insurance will provide you with the funds you need to repair, rebuild, or repurchase your vital business property that has been damaged, as long as the event that caused the damage is covered by your policy.
But what about the many other expenses that business owners need to cover in these types of unfortunate circumstances? How will they keep paying employee wages, rent, and business loans if the business has shut down and isn’t creating any revenue?
That’s what business interruption (also known as business income) insurance is all about.
What is Business Interruption Insurance?
If a business owner must pause operations because of an event that is covered by their property insurance policy, a business interruption policy will pay for the business’s lost income and other expenses while it’s non-operational.
Typically, businesses will purchase business interruption insurance with either a business owners policy (BOP) or a commercial policy package (CPP). A BOP is an insurance package that includes general liability, commercial property, and business interruption insurance packaged together at a discounted price point. A CPP is a similar package of policies, but is more flexible and can include a larger variety of protection, which means it’s typically more expensive than a BOP and offers businesses that have more complex coverage needs a cost-effective solution for minimizing their business risks.
It’s very important to note that business income coverage is triggered only by events that are covered by your commercial property policy. This usually includes events such as vandalism, fires, and wind damage. However, property insurance can be tailored to cover other less common events, but doing so will result in higher property insurance costs.
Any business that relies heavily on its physical locations and equipment or other physical assets to generate revenue (retailers, restaurants, manufacturers, etc.) should have business interruption insurance.
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Small businesses particularly need business income insurance since, without it, many would be forced to shut down their operations permanently in the event that a fire or windstorm causes severe damage to their property that could take weeks or months and potentially thousands of dollars to repair. You can get a business interruption insurance quote in under 10 minutes with Embroker.
Even if the business has property insurance to help cover property and equipment losses, it’s incredibly important to remember that businesses have many other expenses that need to be covered while getting back on their feet.
What Does Business Interruption Insurance Cover?
Since the purpose of business interruption insurance is to help replace the income that your business would have earned had it not been forced to close, it will cover a variety of common business expenses including:
- Staff wages
- Lost profits
- Loan, rent, or mortgage payments
What Doesn’t It Cover?
Just like all other business insurance policies, a business interruption policy will also have certain exclusions. As we mentioned earlier, one of the most obvious exclusions is that the policy will not cover events that are excluded from your commercial property policy.
It also won’t cover losses that can be assigned to economic events and changes in market conditions. If there are utility bills that are no longer being charged while your business is closed, then your policy will not cover them.
Also, if the utility is to blame for its failure to provide services and that’s the reason why your business needs to shut down, that is also not an event that a business interruption policy will typically cover.
You should also make sure that all of your business income is well-documented, because undocumented income is not covered. Neither is income that’s above your policy’s cap income. This is something that you need to keep an eye on when renewing your business interruption policy as your business grows year over year and your revenue (hopefully) increases.
How Much Does Business Interruption Insurance Cost?
Since a business interruption policy is most commonly purchased as part of a BOP package, it’s hard to estimate the independent cost of the policy. Most small businesses can expect to pay between $500 and $3,000 for a BOP.
However, just like with any other type of business insurance policy, there are a variety of factors that can impact your premium, including:
Commercial Property Value: The more your commercial property is worth, the more you will pay for both commercial property and business interruption insurance. However, that also means that the payout will be higher if your property is forced to close down so that you will be able to restore the property’s worth fully or potentially relocate to a location of equal value.
Location: If your property is located in a high-risk area or a particular area of the country that is known for natural disasters, your premium will be higher. For example, businesses located in large cities, particularly in areas with higher crime rates, will pay more for insurance than businesses operating in relatively safe and crime-free suburbs.
Industry and Associated Risks: If what you do poses greater risks to your property, your premium will be higher. Restaurants have open fires and a lot of moving parts that could potentially be hazardous to your property, which is why they obviously pay a lot more for business interruption insurance than a business that consists of a few dozen people working at their desks in an office building.
Revenue: Revenue is one of the most important factors that determines business interruption insurance cost because the policy is designed to compensate businesses for lost revenue while they are not working.
Coverage Limit: The higher your coverage limit is, the more you’re going to have to pay for coverage. The coverage limit is the maximum amount your insurer will pay out in the event of a claim. If your claim exceeds that limit, you’re going to have to pay the difference out of pocket. An insurance agent or broker can help you figure out how much coverage you need so that you aren’t insuring an unnecessarily large amount.
What Do the Terms “Actual Loss Sustained” and “Period of Restoration” Mean?
One term that you will probably run into when seeking out business interruption insurance is “actual loss sustained” or ALS. This term signifies a business’s true loss, meaning that it represents the amount a business would have earned if there was no interruption.
Furthermore, to get the true ALS, you would have to subtract from that total any money that the business was able to earn while it was repairing or restoring its temporarily closed-down property. Your insurer is obligated to pay your actual loss sustained up to the policy limit you have set.
When putting together your business interruption insurance policy, you are going to have to set a period of restoration as well. This means that your insurer wants to know how long it will take for your business to open up again after its temporary closure. Obviously, the longer the insurer will have to provide support, the more your policy will cost.
The period of restoration starts on the day of the loss usually. In most cases, a business interruption insurance policy will not provide coverage for no longer than 12 months.
What is Extra Expense Coverage?
Extra expense coverage is usually purchased with a business interruption policy to cover other types of expenses that a business interruption won’t cover.
One of the most common reasons businesses purchase this coverage is to help cover the costs of moving your business to another location temporarily while your regular location is being restored. In such a case, an extra expense policy would cover the costs of moving to your new location, renting new property and equipment, overtime pay for employees helping with the relocation, and wages and training for new employees needed to work at the new location.
If your business is one that can be easily relocated in the event that you are forced to temporarily shut down your regular location, getting an extra expense policy could be very beneficial because it would allow you to continue earning revenue while your main location is closed.
Business Interruption Insurance and COVID-19
One of the more complicated issues to arise out of the current pandemic is whether business income policies cover COVID-19-related closures. When the crisis hit in March 2020, we created a FAQ for our customers to help them understand what they can expect their insurance to protect them from in such extraordinary circumstances.
Typically, business insurance will not cover losses related to COVID-19. A majority of insurers specifically exclude coverage for viruses and diseases from their policies. This has been the norm since the 2002-2004 SARS outbreak.
Furthermore, most commercial property and business interruption policies specify that they cover “direct physical loss” to the business’s property. If you believe that your business has a legitimate claim, the best course of action would be to have your in-house lawyer review your policy to see if you have a case.
If you’d like to learn more about business interruption insurance and any other coverage your business might need, don’t hesitate to reach out to one of our expert brokers at any time.
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