As a small business owner, your head may start spinning when you think about business insurance. Why? Well, there’s more than one type, and there are also subtypes and amendments that can be used to personalize your policy. It can definitely seem complicated.
One type of business insurance that every small business owner should consider is business interruption insurance, sometimes called business income insurance. This is just what it sounds like: insurance that would cover your financial losses if your business were interrupted by a covered peril, such as a fire or another damaging event.
Let’s take a closer look to help you figure out if it’s worth investing in your own policy.
What is a Business Interruption Policy?
A business interruption policy will cover costs such as staff wages, rent or mortgage payments, and even estimated taxes if you are faced with a named peril—like a fire or hurricane—that shuts down your business for a period of time.
Business interruption coverage is frequently added on to a more comprehensive business policy, such as BOP (business owners policy) insurance. It’s not usually sold on its own, because it’s not the only kind of insurance that your small business needs. Instead, it forms an integral part of a broader policy.
The most common scenario is that you purchase a BOP policy, which includes, at a minimum, the following:
- General liability insurance: Covers claims against you and possible legal costs.
- Commercial property insurance: Covers costs related to the physical assets of your business, from furniture and computers to inventory and tools.
- Business interruption insurance: Covers lost revenue, staff wages, rent payments, and more.
What Disasters Does Business Interruption Insurance Protect Me From?
Business interruption coverage is designed to cover your business following a specific situation: a disaster of some kind that has forced your business to shut its doors. The type of disasters that are covered are usually outlined in the policy, and may include the following:
- Fire or smoke damage
- Wind damage, or damage from an object falling on your place of business
- Lightning damage
- Theft or vandalism
- Damage caused by a riots or civil unrest
- Snow and ice damage
What Does Business Interruption Insurance Typically Cover?
Okay, so let’s say a large tree in front of your coffee shop falls directly on the building, forcing a shutdown. Your first call, of course, is to your insurance company, where you have a BOP policy that includes business interruption coverage.
What will this portion of your policy cover? You already know that the hazard insurance portion (AKA property coverage) of the policy will cover the actual repairs to the building, which will take about a month.
But you’ve got more to worry about than just the physical loss of the building. You’ve got employees to pay, mortgage payments to make, and even the estimated taxes you need to submit this month. And there may be other extra expenses that would normally come out of your monthly income, too. Yikes! That’s where your business interruption insurance policy comes into play.
Business interruption insurance covers the following elements, giving you peace of mind even in the face of a disaster:
- Lost revenue/profits: Your insurer will look at your business’s performance over the past few months and your financial records and determine an average for your monthly revenue. You’ll be reimbursed for those profits for the time the business is closed.
- Rental or lease payments: Even if your business is closed, you will still have to pay the rent each month; and if you lease any equipment, those costs need to be figured into your monthly expenses as well. Business interruption insurance can cover them.
- Staff wages: You don’t want to lose your well-trained staff just because you’re closed for a month. Your policy will pay them for the time they can’t work.
- Taxes: You still need to pay estimated federal, state, and municipal taxes even if you’re not open. Your coverage will help you avoid penalties and pay on time.
- Temporary relocation: Let’s say you decide to open a pop-up coffee shop in the local mall while your primary location is closed. Your policy may cover rent, moving expenses, and other costs.
- Fixed costs: You will still need to pay operating expenses: utilities, maintenance and more; your policy can pay out on these costs even if you have no income for the month.
- Loan payments: If you’ve borrowed money to keep your business running, that’s another expense that business interruption insurance can cover for you.
- Training costs: If your business is disrupted and because of this, you need to replace equipment and train your staff on using that equipment, your policy may cover the costs of doing so.
- Government-issued closures: If your office is closed, for example, because a neighboring building had a gas explosion and your entire street is shut down by municipal authorities, you may file a claim.
What Does Business Interruption Insurance Not Cover?
Just as important as knowing what your insurance will cover, you also need to know what it will not cover. Some of the expenses that are not found in most business interruption policies include the following:
- Extra expenses: This category includes costs that are not part of your regular business expenses, such as hiring temporary staff or paying overtime costs to your regular staff. You can, however, purchase a rider to your policy called extra expense coverage, that will cover these unexpected costs or fees.
- Property damage: Damage to your building or its contents is covered by commercial property insurance. If you have a BOP insurance policy, this type of coverage should be included, along with your business interruption insurance and liability coverage.
- Short interruptions: If a disaster closes you for less than 72 hours, in most cases you won’t be able to file a claim. This is also true if your business only closed down partially, or scales back operations, rather than closing fully.
- Contingent business interruption: This type of coverage, which you can add to your business interruption insurance for a fee, is not covered by most basic policies. It covers you if a third-party business that you depend on—such as a vendor who is a primary supplier to your business—is closed and unable to fulfill their responsibilities to your business.
- Flood or earthquake damage costs: Flooding and earthquakes are in a special category for many types of insurance, including homeowners and business policies. You will need a separate policy for these perils if you are in an area where they are common.
- Undocumented income: If you are earning money or paying out money that is not listed on your financial records, you may not file an insurance claim for it.
How Much Does Business Interruption Insurance Cost?
Since business interruption coverage is usually purchased as part of a larger policy, it’s hard to put a price tag on just how much of your premium cost goes directly to paying for it. There are, in addition, multiple factors that insurers take into account, meaning that every policy is custom-made for each business.
For most small- to mid-sized companies, you can expect your business interruption insurance to cost less than $1,500 a year, on average. To find the best rate, ask your broker to get quotes from several insurers.
How is business insurance calculated? Some of the factors that insurers look at include the following:
- Location: If your business is located on a coastal area that sees frequent hurricanes and wind storms, for example, you may pay more.
- The number of employees you have.
- The amount of coverage you’d like, as well as what you will pay as your deductible.
- Your record of past claims.
- The industry you’re in. For example, you may pay more as the owner of a restaurant than you would if you owned a temporary staffing agency, because of the risk of fires in restaurant kitchens.
What Are the Benefits of Having Business Interruption Insurance?
Business interruption coverage allows the business owner to have more comprehensive insurance coverage than otherwise. Other types of coverage will pay for damages to the building and legal claims against you, but business interruption coverage pays for the nuts-and-bolts costs of running your company.
It's worth noting, however, that there are some disasters that are not covered by a business interruption policy—flooding is one of the big ones—and would require you to purchase an additional endorsement to your policy in order to be covered.
What Triggers a Business Interruption Claim?
Your initial call to your agent or broker begins the process of payment for a covered loss. Your agent can determine if you are covered for the event you’re dealing with and go over the details of your account with you, like your coverage limits and any policy language that you’re uncertain about.
One factor that your insurance agent may explain to you is the “restoration period.” This refers to the length of time that your policy will cover your expenses. According to the Insurance Information Institute, there is generally a 48-72 hour waiting period before benefits kick in for policyholders.
After that, many policies have a restoration period of 30 days, which the policy will cover. After a month is over, your policy benefits end. If you wish, however, you may be able to get that period extended for up to a year—at a cost.
Your agent will also go over the deductible that you would have chosen when you purchased the policy. A deductible is the amount you pay before your insurance benefits kick in. So a $1,000 deductible, for example, would mean that you would, upon making a claim, be required to pay the first $1,000 of costs before you could access those benefits.
People often choose a higher deductible because it means you will pay less for your monthly premiums—but that’s a gamble that may cost you.
What is the Difference Between Business Interruption Insurance and Property Insurance?
We’ve already talked about what losses can be covered by business interruption insurance—but how is it different than a property insurance policy? Property insurance, as the name suggests, pays for the damage to the property you rent or own for your business. Also called hazard insurance, it covers damage to buildings and their contents.
Remember our coffee shop? While business interruption insurance will pay the salaries of your baristas and the lost income while you’re closed, it’s your property insurance coverage that will pay for the physical damage to the building. Let’s say the tree crashed through the front wall, damaging it and destroying the glass and doorway. That’s all covered by your property damage insurance.
By now you may be realizing that what you, as a business owner, need is comprehensive coverage that will handle all of the different financial aspects related to natural disasters or other damaging events. That’s the rationale behind BOP insurance: it bundles together different types of insurance to ensure that you will not face astronomical costs of any kind following a covered event.
Would Business Interruption Insurance Protect My Business During COVID?
The pandemic changed everything for many, and none more so than business owners. By some accounting, roughly one third of America’s small businesses closed, many of them permanently, during the coronavirus pandemic.
The question of whether businesses can file claims based on their closure during the pandemic has also not yet been answered conclusively. The insurance industry claims that their policies are not liable for pandemic coverage, but there are currently nearly 2,000 lawsuits working their way through the courts related to business interruption coverage for COVID.
Many business insurance policies specifically have exclusions for costs incurred by pandemics or other communicable diseases. Your policy may also have this exclusion, but even if it doesn’t, you could have a hard time getting paid out for a disease-related closure. Early indications are that the courts are siding with insurers.
It is likely that policies will, in the future, become more specific regarding the possibility of a payout following a pandemic. If a policy does allow for this use, you can probably expect insurance costs to rise considerably to cover the significant losses a pandemic can bring.
A way to customize your policy is by adding options, called endorsements or riders, to your base policy. These can allow you to purchase more robust and individualized insurance. Here are some common endorsements that are added to business interruption insurance:
- Contingent business interruption insurance: Sometimes called dependent properties coverage, this rider protects your business from financial loss if a third-party supplier or vendor is shut down for any reason. So, for example, if the only available supplier of widgets for your manufacturing business is devastated by a tornado, you could file a claim under this type of insurance.
- Extra expense insurance: Your business income coverage may include this element, which covers extra expenses over and above normal day-by-day operating costs for your business. That might include paying overtime to staff or lease payments on equipment you need to borrow to keep running.
- Civil authority coverage: Sometimes part of your base policy, this coverage pays for losses when a government entity prohibits access to your business premises due to damage to other buildings in the area. It generally only covers two weeks.
- Utility services: This endorsement extends coverage of your business interruption insurance to circumstances where your utility services—electricity, gas, water—are shut down because of a disaster or peril such as a windstorm or hurricane.
Talk to Your Broker about Business Interruption Insurance
There’s a lot that a business owner has to know to run a successful business—including what insurance will protect their investment and keep the business on solid financial footing. Liability coverage and property insurance are probably the first types of insurance that come to mind, but they might not be enough, depending on your circumstances. Why not have a conversation with your insurance agent or broker to see if business interruption insurance makes sense for you?