Around two-thirds of new businesses fail within their first 10 years. While there are many causes of business failure, one of the most overlooked is the inability to recover after a disaster or interruption.
Small or young businesses rarely have the financial reserves to withstand these incidents and get back on their feet. Business interruption insurance can help. Keep reading now to learn what it is, how it works, and who needs it.
What Is a Business Interruption?
A business interruption is when a company has to shut down for a short period of time due to perils beyond its control. Common examples include being unable to open or operate due to:
- Wind or storm damage
- Theft or vandalism of equipment
While standard business insurance will pay for the repairs to the property itself, it does not cover the wide range of other costs businesses face during their shutdown. This is where business interruption insurance coverage comes in.
What Does a Business Interruption Insurance Policy Cover?
Business interruption insurance can cover the various costs your company is likely to incur in the event of a temporary shutdown. These include:
- Mortgage, rent, or lease payments
- Lost revenue
- Wages and benefits
- Relocation expenses
Mortgage, Rent, or Lease Payments
Even if your business can’t open its doors or bring in any income, you are still responsible for making your payments on your mortgage or leasing agreement. Business interruption insurance can cover these payments. This ensures that you don’t:
- Lose your physical campus
- Rack up hefty late payments and penalty fees
- Ruin your credit rating through non-payment
Debt and Taxes
Even during a shutdown, you must continue to pay on any business loans, credit cards, and other forms of debt or credit you have in the name of your business. You also need to pay whatever taxes come due. Without interruption insurance to cover them, these bills can be impossible to pay when you have no income.
Salaries and Wages
A business interruption insurance claim can help you keep your workforce and keep their benefits intact during a shutdown. This gives you the platform you need from which to rebuild.
Losing revenue means more than just not being able to pay your bills. It robs your company of critical funding you would normally use to:
- Perform maintenance and scheduled upgrades
- Grow and expand your business
- Offer employee incentives and bonuses
Business interruption insurance bridges the gap by giving you the money you should have made during your shutdown. In many cases, policies will cover up to a full year’s worth of lost revenue. This replacement income is critical to your ability to rebuild and move forward from catastrophe.
Business interruption insurance can help pay for the costs of moving your operations while your property is restored after a disaster.
Every business interruption insurance policy has a set “restoration period.” This is the period of time between when your policy kicks in and when it stops paying for your business interruption expenses.
Under most policies, your restoration period starts when your coverage goes into effect. This can be 48 or 72 hours after your business first shuts down. Importantly, if you drop down to partial operations before fully shutting down, the 48- to 72-hour waiting period usually does not begin until full shutdown.
Your policy will specify how long your restoration period is. Common lengths of coverage would be 3, 4, 6 or 12 months. The cause of your shutdown does not impact the length of the restoration period and restoration periods cannot be extended.
Policyholders cannot simply wait until their coverage is about to expire before acting, however. They must act in good faith to restore their businesses to full operational status as soon as is reasonably possible. If they do not, they risk disqualifying themselves for continuing coverage.
What Doesn’t Business Interruption Insurance Cover?
While a business interruption insurance plan covers many key costs during your restoration period, it does not cover every expense you may encounter during a shutdown. It also may not cover shutdowns due to certain causes.
Coverage varies from plan to plan, but many policies do not cover shutdowns caused by:
- Pandemics or communicable diseases
If your business is at risk of these things, you may need a separate policy or special rider to protect against them.
Many costs potentially associated with a shutdown are not covered under a business interruption insurance policy because they are already covered under other standard business insurance policies.
For example, your property insurance covers damage to your physical property and equipment. Your liability insurance covers third-party injuries associated with storms or disasters. As such, neither of those things falls under your business interruption insurance.
Business interruption policies also may not cover:
- Utility costs
- Undocumented income
- Extra or unusual expenses (e.g. equipment rental or hiring temporary help)
Interruptions lasting less than the amount of time stated on your policy do not qualify for coverage. Most policies kick in at 72 hours.
Also, your company must completely shut down to file a claim. Scaling back to partial operations is not enough to activate your coverage.
Contingent or dependent properties insurance is often confused with business interruption insurance. Their similarities make this understandable, but they are not interchangeable.
Under a contingent insurance policy, your insurer protects you against interruptions to your business that result from changes somewhere else in the industry pipeline rather than from physical incidents at your campus.
For example, imagine that one of your key suppliers suffers a massive fire. They shut down operations and you become unable to get the components you need. This causes your operations to falter.
The fire was not on your property so your business interruption insurance does not apply. A contingent policy could. It may also kick in if something happened to force a shutdown by your:
- Local leader locations
The modern marketplace is globally interconnected. It relies heavily on just-in-time-delivery. As a result, these types of disruptions are becoming increasingly common.
Businesses’ best protection is to get comprehensive coverage by bundling:
- Contingent insurance policies
- Standard business policies
- Business interruption insurance
Extra Expenses Insurance
Like contingent insurance, people often conflate Extra Expenses policies with business interruption plans even though they are not the same.
Extra expenses policies cover the unusual but necessary expenditures that companies encounter while dealing with physical disasters at their properties. Common examples include:
- Renting equipment to replace damaged equipment while getting operations back up and running
- Hiring temporary staff
- Paying existing staff overtime
- Renting a new secondary location from which to work while your primary site is repaired
- Relocating personnel and functional equipment to a new temporary site
In short, extra expenses policies pay all the unexpected costs you face while trying to reopen your doors as soon as possible after a disaster. As with contingent policies, savvy business owners tend to bundle extra expenses policies with their standard business policies for maximum coverage.
There are two other types of insurance that business owners can purchase separately that are easily confused with business interruption insurance.
The first is Civil Authority coverage. These policies kick in when federal, state, or local authorities prevent companies and workers from accessing their primary campus due to physical damage somewhere nearby.
For example, a governor declares a State of Emergency in the area in which a company is located. They prohibit all non-emergency or non-essential travel, preventing company owners and workers from accessing the site.
Civil Authority coverage tends to be very short-term in nature but can provide the same protections as business interruption coverage in situations where the latter does not apply because the business itself suffered no physical damage.
The second type of coverage often confused with business interruption insurance is a utility services endorsement. These policy add-ons build coverage for utility expenses into business interruption or extra expenses policies that would not otherwise include them.
Who Needs Business Interruption Insurance?
In today’s deeply interconnected marketplace, every company needs business interruption insurance. Coverage is particularly important for:
- New businesses
- Small businesses
- Businesses with limited cash reserves
- Businesses operating in areas prone to storms and other natural disasters
- Businesses where damage to their office or equipment will impact their ability to operate
For those worried about business interruption insurance cost, it is important to be aware that this type of coverage is very affordable.
How Much Does Coverage Cost?
As with other insurance policies, the cost of your business interruption insurance policy will depend on the details of your business. Specifically, insurers look at:
- The value of your physical property, including the cost of your mortgage or lease
- The average risk associated with your industry and location
- Your average income or revenue
- Your average payroll and other expenses
- Your prior claims experience
Companies can purchase only the coverage that they need. Most insurers also offer great pricing on business insurance bundles, which offer the best coverage all around. Above all else, companies should keep in mind that no matter how much their policy costs, it is far more affordable than any other type of protection against disaster and business interruption.
Putting Things in Perspective
American emergency responders handle more than 50,000 fires on commercial properties every year. Depending on the type of property, these fires cause an average of between $8,000 and $130,000 in physical damage alone. The costs of the ensuing shutdowns and income lost during repairs are exponentially higher.
Even businesses operating out of small home offices are at enormous risk. More than 350,000 homes catch fire annually.
Homeowners’ insurance will cover some of the physical losses. Standard business policies will cover other business losses. But entrepreneurs without interruption coverage can still have their businesses devastated.
While fires are only one type of potential business interruption, they provide a representative example of everything that is at stake for companies without the right insurance coverage.
Every day that you go without income and without interruption coverage puts you at higher risk for:
- Incurring crippling debt
- Missing critical payments on loans or property
- Losing key employees
- Hitting the point at which you can no longer financially recover
This is true regardless of the size or nature of your business.
How Much Coverage Do You Need?
There is no standard level of coverage that every business needs when purchasing a business interruption insurance policy. Each policy can be customized to meet an individual business’s situation.
An insurance agent can help you evaluate the following factors to determine how much coverage you need.
- What industry you are in
- Where you are located
- How many employees you have
- Your average revenue and expenses per month
- Your prior claims experience
- Estimated relocation costs
- Other relevant factors
When selecting a policy, it is essential to look at your overall coverage. How much coverage you have under other policies can influence how much coverage you need under your business interruption insurance policy. Layering or braiding policies tends to produce the best result.
It is also important to keep in mind that you cannot get coverage for unreported income or expenses. If either of these regularly plays a role in your operations, talk to your insurance advisor about how to account for them in your policy. Failure to do so can make it harder to get back on your feet in a disaster.
Buying a Policy
Buying a business interruption insurance policy doesn’t have to be difficult or time-consuming, but it does require careful consideration of your business’s needs. Request a quote today and let our experts help you craft the coverage your business deserves.