Business Interruption Insurance Explained

December 5, 2016
Written by C&S Insurance

Only 37% of small business owners are familiar with business interruption insurance, which protects against financial losses when a business is unable to operate.

Unfortunately, many of them will need it one day. Consider these stats:

  • The average number of major power outages occurring in the U.S. has doubled since 2003.
  • After Hurricane Sandy, 52% of the small businesses surveyed in Connecticut, New Jersey, and New York reported lost sales and lost revenue. Roughly 75% had to close their businesses for a period of time following the storm.
  • According to Chubb data, 50% of businesses never return to the marketplace following a major disaster. Of those that do, half go bankrupt within three years.

The following post looks at some common questions surrounding business interruption (BI) insurance. If you don’t see the answer you’re looking for, contact us directly. We’ll be glad to explain BI benefits and options.

What is business interruption insurance?

Business interruption insurance–also known as business income insurance– covers a loss of income following a slowdown or shutdown of your operations. Not every type of business closure applies, but usually the covered losses include fire, power outage*, hurricane, etc. BI coverage kicks in during the time period required to repair or replace the damaged property. It may also be extended to apply to losses suffered after completion of repairs for a specified number of days.

What is extra expense coverage?

Extra expense coverage accounts for bills you may have to pay while trying to minimize the business interruption (for example, renting a temporary work space).

Who needs BI insurance?

Every business should consider BI coverage as a vital piece of its insurance planning and risk management strategy. In today’s world, business interruptions can result from a variety of events: storms, fires, theft, cyber attacks, etc. In fact, business and industrial risk experts say the severity and frequency of BI claims are on the rise.

What are the primary causes of business interruption?

Some leading causes of business interruption, according to AGCS’s Global Claims Review 2015 Report, include: fires, storms, machinery breakdown and faulty designs/materials (manufacturing), strikes, riots, floods, and power outages.

What does BI coverage include?

Business income coverage typically covers lost profits, normal operating expenses (e.g. rent and utilities), and other costs associated with service interruption. In many cases, BI coverage includes payroll expenses, as well, so your employees can continue to get paid.

Is it true that business interruption insurance doesn’t cover downed utilities?

BI is designed to address damages occurring on your business property. Many BI policies contain exclusions for damage to off-premises utilities (for example, a downed power line or malfunctioning pump station several miles down the road). Even though these utility interruptions affect your business–including your ability to open, maintain refrigerated inventory, etc.–they’re probably not covered unless you purchase utility service interruption separately.

What happens after business operations resume?

If you opt to select extended business income coverage, you may receive further protection against lost income even after your operation is restored.

How much BI coverage is enough?

BI coverage is no place for guesswork. Unfortunately, according to Chartered Institute of Loss Adjusters survey, 40 percent of BI coverage declarations were deemed too low by about 45 percent. To ensure your limit will be adequate, you’ll need to accurately project revenue for the upcoming 12-month period. Next, you’ll need to assess how long it would take to replace all damaged property and resume operations in the event of a worst-case loss. From there, you can work with your insurance agent to select a business income limit of insurance.

At the end of the day, you can’t afford to gamble your business’ future (or your employees’ livelihood) on the promise of smooth sailing. Arm yourself with a business continuity plan that includes paid protection for unexpected downtime. As always, feel free to reach out with your specific questions.