What is Business Interruption Insurance?

If your business is faced with a temporary closure or interruption of operations, does your insurance policy provide coverage? Chances are, it doesn’t. Business interruption (BI) insurance is a specialized add-on policy that covers the financial losses a company experiences due to an unexpected event. Read on to learn more about BI insurance and how it can protect your business.

Definition of Business Interruption Insurance

Business Interruption Insurance, also known as Business Income Coverage, helps replace lost income when a business is affected by a covered peril. A typical Business Owner’s Policy will include Business Interruption insurance, Commercial Property Insurance, and General Liability Insurance. It is important to note that this type of policy is not sold as its policy; rather, it can be added to a business policy. 

Business Interruption Insurance can reimburse you in several ways after interruptions due to a covered peril. First, the policy provides reimbursement for profits that would have been earned if the event had not occurred, based on the previous month’s financial records. It also covers fixed expenses, like operating expenses and other incurred costs of doing business. If your building is damaged due to a covered peril, the policy will cover the costs associated with relocating your office temporarily. If your business purchases new equipment due to a covered peril, the policy will cover the cost of retraining employees on how to use the new equipment. The policy also pays employee wages, pays federal and state taxes, and makes loan payments while the business cannot operate.

What Perils Does Business Interruption Insurance Typically Cover and Not Cover?

Business Interruption Insurance typically covers perils like theft, fire, high winds, falling objects, and lightning. For example, if a tree branch damages the roof of your office space during a storm, Business Interruption Insurance will cover the costs associated with temporarily relocating your office or loss of income due to closing. It is important to read over your business insurance policy so you know exactly what is covered for your business.

Business Interruption Insurance does not cover several common perils. First, it does not cover the cost of repairing damaged property and the replacement of equipment. Rather, your Business Owner’s Insurance policy likely has property coverage that would cover those costs. Additionally, most policies do not cover broken items, undocumented income, utilities, or interruptions from communicable diseases like COVID-19. Business Interruption Insurance also does not cover damages due to floods or earthquakes. If your business is in an area with high risk for either of those natural disasters, you will need to invest in a separate insurance policy.

How Much Coverage Do You Need?

All Business Interruption Insurance policies have a coverage limit. A coverage limit is the amount of coverage you choose to have if you suffer a loss or interruption. It can be very difficult to determine how much coverage your business needs. A good rule of thumb is to use your gross earnings and projections to estimate future profits to determine the right amount of coverage for your business. It is also important to think about how long it would take your company to recover from a loss, if you could temporarily relocate, and if your office space has working fire alarms and sprinkler systems. Remember that you are obligated to pay out of pocket any costs that exceed your coverage limit.

The cost of Business Interruption Insurance can vary widely. Cost depends on several factors like industry, number of employees, and amount of coverage. The cost of the policy can also be higher if your business’s risk for a particular peril or loss is higher than normal. For example, if your business is in an area that is prone to wildfires, the cost of coverage may be higher.

The Restoration Period

The restoration period is the length of time when your policy will help pay for lost income. According to the Insurance Information Institute, the standard policy is 30 days but can be extended to a maximum of 365 days. There is normally a 45 to 72-hour waiting period before coverage kicks in. Read your policy documents so that you know when your coverage starts and when it ends.

If you are in the market for a Business Owner’s Insurance policy that includes Business Interruption Insurance coverage, reach out to Coughlin Insurance today!

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