Covering Losses with Business Interruption Insurance

Standard property insurance covers physical damage and losses—furniture destroyed in a fire, a storm-damaged office building or stolen equipment. This coverage can help you pay the costs of rebuilding or replacing damaged property. But what about losses resulting from your business’s inability to operate because of property damage? For this type of loss, you’ll need business interruption insurance, also known as business income insurance.

Coverage to Keep Your Business Afloat

When your business is shut down due to a damaging event—a fire or windstorm, for instance—you lose revenue. In addition, your business is still obligated to pay its bills and may incur additional expenses as a result of the disruption. Fortunately, if you have business interruption coverage, many of these costs and losses can be reimbursed. Generally, business interruption insurance will cover:

• Revenue lost due to the closure.
• Fixed expenses, such as rent and utility costs.
• Expenses of operating from a temporary location.

Your policy may cover additional extra expenses associated with the disruption—for instance, advertising to announce your new temporary location.

To receive appropriate reimbursement from your business interruption coverage, there must be direct physical damage to the property resulting from an insured event.

Determining a business interruption loss involves establishing what the business would have earned had the loss not occurred. Insurance companies take into account past tax returns, profit and loss statements, projected sales and non-continuing expenses. It is crucial to keep very accurate records so that your business interruption losses can be properly projected.

Obtaining Business Interruption Coverage

Business interruption coverage is not sold as a stand-alone policy. It can be obtained as part of the following types of policies:

• Commercial Property Insurance—You can add an endorsement or rider to commercial property insurance that will extend the policy’s coverage to business interruption losses.
• Business Owners Policy (BOP)—Intended for small businesses, this type of insurance package policy includes property, liability and business interruption coverage.
• Commercial Package Policy (CPP)—CPPs are flexible policies that can be customized with a range of options, including business interruption coverage.

Other types of policies may include business interruption coverage for certain circumstances. For instance, some kidnap and ransom policies will cover business interruption loses resulting from a covered event.

Understanding the Limitations of Business Interruption Coverage

While business interruption insurance can help your business survive a disaster, there are limitations and exceptions to this type of coverage. If you obtain business interruption coverage as part of a commercial property policy, the coverage will only extend to events delineated in the core coverage. If your property insurance does not cover wind damage, you cannot receive business interruption insurance if your company is displaced because of a windstorm.

There are also time limits on business interruption coverage, so be sure to discuss limitations and exceptions with your insurer or insurance professional, and whether purchasing extended business income coverage is a good option for your business.