What Is Business Interruption Insurance and What Does It Cover?
Not all small business owners are familiar with business interruption insurance. In fact, only about one-third of U.S. small businesses have interruption insurance.
Unfortunately, many of them will need it one day. Consider these stats:
- According to a Federal Emergency Management Agency (FEMA) , 40% of businesses never reopen after a disaster. Of those that do reopen, 25% fail within one year and 75% will fail in three years without a business continuity plan.
- The average number of major power outages (one of the top causes of business downtime) in the U.S. has increased 67% since 2000.
This post considers 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 — or business income insurance — covers a loss of income and certain operating expenses if a disaster ever forces you to temporarily close shop. It can be found under commercial property coverage or added as an endorsement to that coverage. Either way, it’s important to remember that business interruption insurance usually functions as an extension of your property insurance, which helps to explain some of its terms and limitations.
As for why business interruption insurance is important, let’s look at an example scenario. Imagine your restaurant suffers damage as a result of a fire. Due to the extent of the repairs, you won’t be able to open for several weeks. If you have a BI policy in place, you can expect it to cover your lost income and other business expenses until you’re able to open again.
Now, imagine you don’t have business interruption coverage. In this case, your lost income won’t be reimbursed, which can lead to financial trouble or even the inability to reopen your restaurant.
NOTE: BI insurance can also be included in or added to commercial cyber insurance policies. More on this below.
When does business interruption insurance apply?
Not every type of shutdown is covered by business interruption insurance. In most cases, three main criteria must be met:
1. The “interruption” must be caused by a covered peril.
A covered peril is a loss event that is listed in your commercial property insurance policy. In most cases, covered perils include fires, riots, windstorms, and other natural disasters. Floods and earthquakes are common exceptions. Because these disasters are typically not listed on standard commercial property policies (and require separate coverage), they wouldn’t qualify as triggers for business interruption coverage either. Be sure to carefully review the types of events that are and aren’t covered with your agent.
2. The business must suffer direct, physical damage.
For example, a fire destroys your restaurant kitchen or a hurricane rips the roof off your store. In both examples, there is physical property damage that must be repaired. The physical damage component is important in starting the clock for your business interruption coverage. Coverage starts within hours after the damage happens (see criteria #3 below) and ends when that damage is repaired (or reasonably should be repaired). The days in between are known as the “restoration period.” This is the timeframe that qualifies for lost income and operating expense reimbursement.
In some cases, business interruption may cover a situation in which your company has a power outage and suffers a loss due to a nearby broken utility pole. Another example that may be covered is a grocery store that loses produce due to a power outage. This comes down to the agent and specific coverage or policy.
3. The waiting period deductible must expire.
In many policies, the waiting period usually lasts between 24 and 72 hours. Most business interruption coverage is designed to respond one to three days after the interrupting event occurs (though insurers can request that the length be decreased or even eliminated for a higher premium). This waiting period or “time deductible” replaces the dollar amount deductible you might see in other types of policies.
While there are exceptions to these rules, the above conditions usually apply.
What does business interruption insurance cover?
Business interruption insurance is designed to cover the following categories:
- Lost income – This is calculated based on documented profits earned during a similar timeframe.
- Operating Expenses – These include fixed costs like your rent, mortgage, lease, or taxes.
- Payroll – BI allows you to continue to cover employees’ wages during a slowdown or shutdown.
- Temporary Location – Extra expenses (loan payment, mortgage, lease payment, moving expenses, etc.) are covered if you must move into a temporary office. It also covers additional rent owed above your normal rent cost.
- Commission and Training Cost – If a company needs to replace machinery and retrain employees on how to safely operate the new machinery, this will be covered.
- Taxes – This ensures a business can pay taxes on time, whether taxes are due yearly, monthly, or quarterly. Not only does BI coverage help you keep up with tax payments, it comes with tax benefits as well. In most situations, policy premiums qualify as business expenses, making them tax deductible.
- Contingent Business Interruption (CBI) – If your business relies on another business (like a manufacturer) and the other business is delayed therefore delaying your business, you can submit a claim for coverage. There are a few types of CBI.
- Lender Property (Attraction Property) – Your physical business relies on a nearby business for traffic and that company is damaged. (Example: If your restaurant is in a casino and the casino closes due to hurricane damage.)
- Interruption by Civil Authority – Example: A road near your business is shut down and this prevents your business from running.
Business Interruption Coverage Restoration Period
The restoration period is the timeframe that begins right after the loss occurs and extends until the company can resume normal business operations. This is the period that qualifies for lost income and operating expense reimbursement. There is typically a 24- to 72-hour waiting period associated with this timeframe. Some insurance companies may offer an extended restoration period, but this will need to be defined when the policy is purchased.
What does business interruption NOT cover?
This list is by no means exhaustive, but it highlights several of the common exclusions that business owners should be most aware of:
- Shutdowns caused by a pathogen, communicable disease, or virus (e.g. COVID-19)
- Shutdowns or slowdowns caused by government-issued capacity restrictions or lockdowns
- Shutdowns caused by flood or earthquake damage, which require separate insurance
Business Insurance and Pandemics
In the United States, traditional business insurance does not cover pandemic. Robert Gordon, Senior Vice President of Policy of the American Property Casualty Insurance Association says, “Business interruption insurance only provides potential coverage when there is direct physical loss or damage… Pandemics do not cause direct physical loss or damage and are a largely uninsurable risk.”
In a recent ruling, the Massachusetts Supreme Court confirmed this policy, determining that three Boston-area restaurants could not recoup income lost during COVID-19 and its associated lockdowns. Similarly, Bill SD.2888 attempted to establish a provision in Massachusetts that would have enabled COVID-related losses to be covered under BI, however it did not gain the necessary support.
How Do I Get Business Interruption Insurance?
The first step is to contact an insurance agency. Reach out to a firm with a reputable team like C&S Insurance, who will take the time to understand your risks and recommend important coverages. Some agencies, like C&S, can provide customized coverage. For example, the property risk will be different if a business has one location or multiple.
How to Reduce Losses After an Interruption
Make sure that you file a claim as soon as possible. The sooner you file a claim, the sooner it can be processed and paid out. Take action to prevent further loss, like boarding up any broken windows and making sure doors have working locks. Your insurance company may reimburse you for these materials.
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, break-ins, 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 Claims?
Some leading causes of business interruption insurance claims, according to AGCS’s Global Claims Review 2018 Report are fires, aviation collisions, storms, defective products, water damage, and machine breakdowns. Note that not all of these causes are covered by the standard scope of business interruption insurance. It’s a good idea to discuss these and other potential loss events with your business insurance agent so you can supplement with enhanced coverage as needed.
Does Business Interruption Insurance Cover Power Outages?
After a major storm, your access to electricity, water, telephone service, or internet service could be cut off for weeks. And yet, power outages can happen without causing any physical damage to your property. (Refer to criteria #2 above) So, are utility interruptions covered by business interruption insurance? The short answer is: It depends.
Some property policies do include coverage for utility “service interruption” caused by damage to a transmission line, power plant, transformer, or pump station. In other cases, businesses must purchase a separate utility service interruption endorsement or off-site utility service interruption endorsement to ensure coverage for these types of power outage events.
What Is Utility Service Interruption Insurance?
This endorsement may also be called “off-premises power coverage.” Without overcomplicating the matter, you can add this coverage to address the potential gaps noted above.
But beware: Even when buying coverage specifically for utility disruptions, terms and exclusions still exist. For example, you will likely find distance limitations (i.e., how far from your property the damage can occur and still be covered). Outages caused by earthquakes or flood damage are often still excluded, as are overhead transmission lines. (You can opt to include overhead transmission lines, typically for a small increase in pricing.) Finally, like BI coverage itself, utility endorsements often contain a waiting period (ranging from 12–72 hours) before the coverage will kick in.
Here again, it’s important to ask your agent if and how your policy language addresses power outages and utility service disruption, and explore additional endorsements as needed.
What Is Extra Expense Coverage?
Extra expense coverage is similar to business interruption insurance, but they’re not exactly the same. And in many cases, it makes sense to carry both types of protection. After a business disruption, extra expense coverage kicks in to reimburse you for any out-of-the-ordinary expenses that crop up as you attempt to work around the disruption.
For example, if you rent a new space or lease new equipment while your original property is repaired, extra expense insurance would cover the extra cost over your normal expense. Extra expense coverage can be secured as part of your business owner’s policy (BOP) or as an endorsement to your commercial property coverage.
What Happens After Business Operations Resume?
Typically, your coverage will end after business operations resume. A standard BOP may offer 12 months of BI coverage. There is the option to purchase extended coverage beyond the standard coverage. If you opt to select extended business income coverage, you may receive further protection against lost income even after some of the operations are restored.
How much BI coverage is enough?
BI coverage is no place for guesswork. 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.
Frequently Asked Questions
Q: What Does Business Interruption Insurance Cover?
A: Business interruption insurance covers financial losses when a business is unable to operate due to a covered cause of loss.
Q: Does Business Interruption Insurance Cover Loss Due to COVID-19?
A: No, since COVID-19 or other pandemics do not physically harm a business’s physical location.
Q: Who Can Get Business Interruption Insurance?
A: Any business can apply for business interruption insurance.
Q: How Much Business Interruption Coverage Do I Need?
A: This will be different per business. To get a general idea of how much coverage is right for you, you’ll need to assess your projected revenue for the upcoming year and the amount of time you would need to resume operations in a worst-case scenario. Your insurance company can help you figure out how much business interruption coverage you need.
Q: How Much Does Business Interruption Insurance Coverage Cost?
A: This will also be different per business. Insurance costs for an ice cream truck will be vastly different than a clothing store.
Q: How Do I Submit a Business Interruption Claim?
A: When preparing to submit a BI claim with your insurance company, it’s important to document the events that led to the interruption, provide proof of loss and evidence of loss mitigation attempts, and total the amount of the loss. This is all information that your provider will need in order to sufficiently make their determination. It’s also crucial to keep your policy’s deadlines in mind, as your claim may be denied if you miss these due dates.
Q: What Are Some Common Misconceptions About Business Interruption Insurance?
A: First, business interruption insurance doesn’t cover losses that occur as a result of any and all halts in business. Coverage only applies for a specific set of circumstances that will be detailed in your policy. Additionally, BI insurance isn’t typically included in general business insurance policies. This coverage is most always an extra add-on. Finally, just because you have BI coverage, doesn’t mean you don’t need to make an effort to prevent interruptions. When it comes time to submit a claim, adjusters will inspect the property to check that you took precautionary measures.
Find Your Business Interruption Insurance Policy with C&S
If you’re looking for a BI insurance policy for your Massachusetts business, we’ve got you covered. At C&S Insurance, we’ve been helping local business owners just like you find the policies they need since 1959. Today, we’re a statewide agency with the kind of resources, capabilities, and network that enables us to offer you best-in-class insurance. Get in touch today to get started.