Business Interruption Insurance
What is business interruption insurance?
Business interruption insurance (BII) helps cover any lost income and operating expenses when a business has to close down temporarily due to a disaster like fire, storm, theft, or vandalism. Running a business is full of risks when you don’t have the right insurance. Let’s say a tree falls and damages your office roof. Due to this incident, no one can enter your business premises. This accident forces you to shut down your business temporarily for a restoration. Business interruption insurance, also known as business income insurance helps you cover for the lost income.
A business must pay regular bills such as taxes, rent, insurance, and utilities. even when their operations is disrupted and has no income. The company might have to incur additional expenses linked to the loss. For example, rent on a temporary location, employee overtime, and moving expenses. Business interruption insurance covers such costs and damages.
Business interruption insurance also provides funds for a specified period after the business re-opens and gets back to its pre-loss income level. The coverage helps firms to gain the financial position they would have been in had the incident not occurred. Business income is vital for any business to avoid the financial loss and for the company to continue operating.
The insurance policies like commercial auto insurance and commercial property insurance covers the cost to replace or rebuild the damaged properties. However, they do not include the losses that occur while the business temporarily shuts down. Business interruption insurance incorporates any ongoing expenses, net profit, and unusual expenses when work is interrupted by natural disasters, employee fatality, terrorism, and executive kidnapping. According to research conducted by Allianz, business interruption ranks as the second most crucial business risk globally.
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What does business interruption insurance cover?
Business interruption insurance covers the following operating expenses if your business has to shut down temporarily:
- Lost revenue:
Business interruption insurance compensates for the lost income if your business is unable to provide services to customers or make sales due to property damage. It makes sure that a temporary shutdown does not become a permanent closure.
- Expenses to reduce loss:
When a firm faces a physical loss, their insurance company can help minimize the loss of income by incurring some costs to keep the business going.
For example, a loft rented by a beauty salon gets damaged due to faulty water pipes. Everything gets destroyed, and the attic cannot be in business for two months—the salon rents a temporary location to keep the business operating. The policyholder will bear the extra rental costs, so they reduce the overall business income loss.
- New locations:
Business interruption insurance will cover the moving cost if you have to move your business due to any unfortunate event. It also pays the rent of the new location.
- Interruption of computer operations:
Every business utilizes computer data in its daily operations. If their data is corrupted or destroyed, the company might not operate, leading to a partial or complete shutdown. Business revenue insurance provides coverage for income loss due to interference in computer operations.
Businesses still need to pay their quarterly or annual tax obligations even during the temporary shutdown. Business interruption insurance covers the funds required to pay the tax even though the business is no longer bringing in any revenue.
- New buildings and remodeling:
You might decide to restore existing buildings or add a new building at the current location. If covered perils destroy the renovations or the new construction, businesses will postpone, resulting in loss of income. Business interruption insurance covers such damages.
- Employee wages:
Businesses might shut down temporarily due to a disaster. However, employees in the meantime will need their paychecks, or else they will seek employment someplace else. So, payroll obligations must meet to retain employees. Business interruption coverage covers the payroll while the business isn’t making revenue. According to AICPA, many policies limit their coverages for regular payment during the suspension of business operations to a specified period, such as 60 days.
- Civil authority ingress:
Your business insurance also covers any lost income if you have to shut down your business because a government agency prevents access to your building. According to IRMI, the civil authority will only apply when a loss causes damage; otherwise, property insurance covers the costs.
Business interruption insurance covers only when all of the following conditions are met:
- Income loss:
Companies suffer an income loss because of an unavoidable suspension in business operations.
- Physical loss:
This suspension comes from the physical damage to a covered peril to property at the location specified in the declarations. In a section of the policy known as Causes of Loss, you can find the covered perils.
- Scheduled limit:
The business income limit is specified for the location where the physical loss occurs.
- Period of restoration:
The interruption must take place during the period called the period of restoration. The time frame of restoration starts from the date your business got interrupted until the date your property is right for business. According to Business Journal, it takes 48 hours waiting period before business income coverage initiates.
Some standard endorsement and exclusions you must consider:
You can modify your coverages by adding endorsements depending upon the risks that your business encounters. Some of the endorsements are:
- Utility interruption coverage:
Some businesses can run without utilities such as water and electricity. However, to some companies, if the utilities are interrupted, they might have to shut down, leading to loss of income. In such cases having a utility interruption coverage included in the business income forms will help to recover the loss.
- Building ordinance coverage:
Most business interruption insurance does not provide coverage for income losses that result from building code enforcement. If a building needs additional time to repair to comply with the building code, business interruption coverage will not cover the loss during that extra period. In such cases, an endorsement like building ordinance coverage incurs losses due to increased business suspension.
- Contingent business interruption:
Business interruption insurance provides coverage when your business closes temporarily, and you endure direct loss. However, your business might suffer indirect damage if another company that you are dependent on closes temporarily or permanently. Contingent business interruption coverage provides financial aid when a primary partner, supplier, or customer affects your ability to do business. It covers any ongoing expenses while you look for a replacement.
Business interruption insurance doesn’t provide coverage for:
Business interruption insurance does not cover services such as electricity and water. So, if you have to shut your business premises temporarily, it is wise to call the utility provider to stop the services.
- Voluntary closures:
If you close your business voluntarily, you cannot enjoy any insurance benefits.
- Earthquakes and floods:
Although business interruption insurance covers natural disasters, earthquakes and floods need their separate policies like earthquake insurance or commercial flood insurance.
- Direct property damage:
Business interruption insurance ensures loss of income and expenses. In case of damages to businesses’ belongings, commercial property insurance is appropriate.
- Seasonal slumps:
Business interruption insurance does not cover seasonal slumps or natural business trends.
- Extra expenses:
Business interruption insurance provides coverage for any regular costs incurred during a temporary shutdown. Additional costs such as hiring temporary workers, leasing tools, paying employee overtime are not covered.
Business interruption insurance will not provide coverage for lawsuits arising from any bodily injuries or property damage that your company caused. It is not a type of liability insurance.
- Employee injuries:
Business interruption insurance pays the wages of your employees. However, if your employees hurt themselves while working, workers’ compensation insurance will provide the necessary coverage.
Type of insurance that includes business interruption insurance:
Multiple factors that determine business interruption insurance cost are:
Costs for business income insurance can vary greatly. The significant factors that impact premiums is the size of the business, and the amount of money required to keep the business running in case of a disaster. A business interruption insurance worksheet helps figure these out:
- Business location:
In case your business is located in an area that is prone to natural disasters, premiums will rise. For example, a company in the coastal region will need to pay a higher premium due to the risks in that location.
- Business size:
Unlike small businesses, businesses that have larger area require a longer time to rebuild the damaged property. Likewise, it would also be costlier to restructure a building compared to a store.
- Type of business:
The nature of the company also affects the cost of insurance. For example, a restaurant might pay more than a clothing store because it has a higher risk of fire.
- Business’s claims history:
If you have a clean claims history, you could have lower premiums compared to a business with claims history.
- Safety measures to protect your business premises:
If you have installed security cameras, sprinkler systems, or any other safety devices, it reduces the risks of accident. Therefore, when the risks are minimized the premium also decreases.
Some common business interruption insurance claims:
Insurance coverage for business interruption due to direct physical loss is more likely to exist than when the disruption is not from direct physical damage.
According to Insurance Journal, Hurricane Katrina caused significant disturbance to businesses on August 30, 2005. Many hotels in New Orleans suffered damages due to wind and flooding and had thus had their income protected by business income insurance. The oil industry, along with its rigs and refineries that shut down as hurricane Rita and Katrina ripped through the Gulf Coast, also had business interruption insurance.
There have been many instances in the past where policyholders have submitted business interruption claims for non-direct income losses. However, they were unsuccessful in court.
According to Insurance Information Institute, luxury hotel chain Wyndham International filed a lawsuit in August 2002 against half a dozen of its insurers. Wyndham claimed they suffered $44 million in lost revenue due to the terrorist acts of 9/11/2001. They further contended that the insurers had acted in bad faith in failing to pay the business interruption claims. The properties that Wyndham claimed to be interrupted was in Puerto Rico, Philadelphia, and Chicago. There are no properties owned by Wyndham in downtown New York City. Out of all the insurance claims, 33% of losses were business interruption related.
Frequently asked questions regarding business interruption insurance:
How is business interruption insurance and property insurance different?
Property insurance covers the physical damage to the business. On the other hand, business interruption insurance helps to recover the lost business income and any business expenses while your business closes temporarily.
What if I own an eBusiness? Is a BII still necessary?
I work on sites, not at an office, do I still need BII?
Does my business insurance not include BII?
Does business interruption insurance protect the company from loss due to a virus?
According to an article by Globest, if your business shuts down due to COVID-19, but the building remains habitable, business income will not cover the losses. However, if the building contaminates due to the virus, it will be covered by business interruption insurance.