Business interruptions can come in all shapes and sizes. Whether a natural disaster that knocks out power for weeks or a fire that destroys your property and inventory, these risks can bring your operations to a standstill. According to the Federal Emergency Management Agency (FEMA), about 25% of businesses don’t reopen after a disaster due to financial loss.
Being unable to open your doors to customers creates obvious challenges. If you can’t run your business, how are you supposed to generate revenue? How are you going to pay employees or vendor invoices?
These are all questions every business owner thinks about, but doesn’t ever want to face. One way to protect yourself and your business against such risks is by taking out a business interruption insurance policy to enhance your firm’s coverage.
Let’s take a close look at what business insurance is, what it does and doesn’t cover, how this type of coverage differs from other insurance plans and why it can be beneficial to have this form of umbrella protection for your business.
What is business interruption insurance coverage?
Whereas other types of business insurance might cover costs incurred due to damage or a lawsuit, business interruption insurance can actually replace lost income during periods when your business can’t operate.
So, in the case of a natural disaster like a fire or tornado, this type of coverage can recover affected business income. Also, in rare cases, business interruption insurance coverage can apply if a civil authority shuts down a business because of direct physical loss to a nearby business, causing the business to lose money.
Common Causes of a Business Interruption Claim
Although there are several reasons for a supply chain disruption or for a business to be brought to a halt, some are more common than others, including:
Fire and Explosion
Fire and explosions are constantly at the top of the list of leading interruption factors as they result in billions of dollars of business-related losses every year. Although any industry could experience a horrible fire, the most affected businesses include those that use or handle electrical hazards, complex machinery and flammable liquids.
To lower your risk:
- Use fire protection equipment, and always have safety items close by.
- Dispose of all flammable and combustible materials properly.
- Store dangerous materials in a dry, secure place.
- Train your employees on fire safety measures, and always know where your exits are in the case of an emergency.
Some weather events can become catastrophic, and it’s important to be prepared. Natural disasters like wildfires, floods, earthquakes and tornados are constantly contributing to rising business interruptions around the world. Although not every type of storm will lead to your business shutting down, some have the power to knock your company off its feet for an extended period of time.
To reduce your risk:
- Build an effective loss control strategy.
- Create a disaster preparedness plan for your business in the case of an emergency.
- Store all of your financial documents and important information on the cloud for quick business recovery and reboot.
- Ensure you have adequate insurance coverage to protect your company from the effects of natural disasters.
What Business Interruption Insurance Covers
This type of business interruption insurance coverage primarily works to replace lost income and revenue. The amount of money you’ll receive depends largely on your historical financial records, so be sure to preserve all your important earnings and profit forecast documentation.
It can also help provide financial assistance in terms of:
- Employee payroll.
- Fixed operating expenses.
- Commercial mortgage, rent or lease payments.
- Training on new equipment.
- Loan payments.
- Temporary relocation.
- Extra expense.
Most importantly, a policy will cover lost income due to a covered peril (i.e., an event that is explicitly covered by your insurance). Typically, covered perils for business interruption insurance include:
- Natural disasters (excluding earthquakes and floods).
- Fires that destroy property or product inventory.
- Forced closures due to civil authority mandates.
There’s a limit to how long you can receive benefits, however. That timeframe is determined by the restoration period as defined in your policy. This can last anywhere from 30 days to 12 months. Typically, you’ll need to wait one to three days after making a claim before the restoration period begins.
What Business Interruption Insurance Doesn’t Cover
While interruption insurance can provide a financial safety net if your business is forced to close, it doesn’t cover every event or type of cost.
One major point to be aware of is that such policies don’t cover pandemics. This has become a point of contention in the wake of COVID-19, but, for the most part, business interruption insurance doesn’t cover shutdowns due to disease spread.
Other costs not covered by interruption insurance typically include:
- Broken glass and windows.
- Undocumented income that wasn’t included in your financial statements.
Also, as mentioned, losses due to flood and earthquake damage aren’t covered. This is because separate policies like flood insurance and earthquake insurance need to be taken out for these types of natural disasters.
How Does It Differ From Other Types of Business Insurance?
Ideally, businesses need diverse types of insurance to ensure they’re fully protected. For example, interruption insurance differs from other common forms of business insurance in some key ways. Just be aware of what your unique coverage needs are as you make business insurance decisions.
Whereas interruption insurance covers lost income, a general liability policy protects your business from claims of property damage and bodily or personal injury that occurs on your premises or is caused by a product or employee.
Another main type of liability insurance that employers should know about which differs from a business interruption plan is employment practices liability insurance. While business interruption protects your business from financial loss, employment practices liability coverage keeps your company safe in the event of an employee lawsuit regarding sexual harassment, wrongful termination, discrimination, breach of employment contract and deprivation of career opportunity.
Business interruption insurance also doesn’t cover commercial property. Commercial property insurance protects the business’ location and physical property, including equipment, inventory and furniture in the event of an emergency like a fire or natural disaster. Property damage due to riots, civil commotion and vandalism is also generally covered by commercial property insurance rather than business interruption insurance.
Why Is Business Interruption Insurance Important?
If your business has ever experienced a fire, natural disaster, theft or civil interruption in the past, then you should look at how long your recovery period was without any business interruption policy. Then, imagine having most of the hard work taken care of and being able to land on your feet within a shorter time frame.
That’s why business interruption coverage is so important. Although it can’t keep disasters from striking, it can help businesses of all sizes resume their company operations and finance their next steps forward — whether that’s taking care of direct physical loss, fixing property damage or rebalancing business income.
How Do I Get This Kind of Protection for My Business?
There are different ways to get business interruption insurance coverage. Sometimes, it’s sold on its own; in other instances, it may be offered as an extra endorsement or as part of a business owner’s policy (BOP).
This article has been updated. Originally published October 28, 2020.
Interested in learning more? Download our business insurance eBook, and contact Bank Midwest today to speak to an insurance professional about commercial policies and how we can help.