Business Interruption Insurance:

All You Need to Know

In today’s climate, where there’s an ongoing pandemic, ever increasing natural disasters, as well as mounting civil unrest, businesses in the United States would be wise to purchase business interruption (BI) insurance. 

It assists in covering operating expenses and any lost income due to temporary closure of business from events such as fire, natural disasters, vandalism or theft, so it is especially timely. According to a 2020 report by Allianz, business interruption and the risks related to it came in second on a list of the top global risks faced by businesses today, with cyber incidents ranked as number one.

In this article

Why is BI Insurance Necessary?

It is no surprise that when business operations come to a halt, businesses must pay rent, utilities, taxes and insurance on a regular basis. However, without an active income from business operations, it may be very difficult for businesses to pay for  costs associated with the shutdown. During such times, BI insurance helps covers the costs and damages. 

For example, a natural disaster might strike the area of your business and leave behind a trail of destruction. The destruction is so thorough that you temporarily close down your business until things are fully functional again. With a BI insurance policy, it will help you cover for the lost income during the closure. Furthermore, BI insurance also helps covers funds for a period of time after your business has re-opened until you are able to get back on your feet.  

Generally, businesses purchase commercial property insurance and commercial auto insurance to cover for any unfortunate circumstances. These policies cover the cost of rebuilding or replacing damaged properties. However, they do not cover the losses that occur due to temporary shutdown of the business. It is in cases like these where BI insurance is necessary as it specifically covers such events. 

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What Does BI Insurance Cover?

In any event where your business has to shut down temporarily, BI insurance covers the following applicable expenses:

Lost Revenue

A BI insurance policy reimburses for possible loss of income if your business operations are halted due to covered perils. Your insurer will determine what your projected revenue was going to be had your business not encountered physical damage. Carriers calculate replacement income differently—which will affect how much money you receive back during a claim—so it’s wise to clarify with your provider before signing.

Expenses to reduce loss

When a business is physically damaged from a peril covered by the policy, the insurer can help the business reduce financial losses by covering the costs to temporarily run the business. For example, a business is shut down due to faulty electrical wiring and needs to temporarily relocate and operate at a lower efficiency. During such a situation, the insurer will bear the extra rental costs and utilities so the overall business income loss is reduced.

New locations

When you are running a business, situations can arise where you need to move business locations due to unforeseen circumstances. In such scenarios, business interruption insurance can help cover the cost of moving, transportation of equipment, and even the rent of the new business location.

Interruption of computer operations

Almost every business uses computers for day to day operations. From account information to business strategies, every important document is in the computer storage.

When the data are destroyed or corrupted due to unfortunate circumstances, the company might face a partial or complete shutdown. BI insurance can provide coverage for any income loss during this time. However, BI insurance will not provide coverage in the event of cybercrime or cyberattack.

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Taxes

Every business has to pay taxes. Even if a business shuts down temporarily, taxes still must be paid. During such situations, BI insurance can provide the funds required to pay taxes when the company is not making any money.

New buildings and remodeling

Everything changes with time and that includes the look of your business. Let’s say your place of business needs a revamp or even just some renovations. If any of the covered events (fire, natural disaster, etc.) occur during the renovations, your business will have to postpone its re-opening. This delay can result in a loss of income, which can be covered by BI insurance.

Employee wages

When a business shuts down due to some unforeseen disaster, its employees will still require their paychecks. To retain your workforce, paying them is a must. BI insurance covers employee payroll when the business is not making any income.

However, there are limits to how long a policy will provide this coverage. As per a study by the AICPA, a significant number of policies tend to limit their payroll coverages to around 60 days.

Civil authority declaration 

Your business can lose income if a government agency (such as firefighters or police etc.) prevents operations by completely blocking access to your business when responding to a peril covered by your policy. BI insurance will cover any losses in this situation. IRMI reports that the civil authority declaration is applicable when it meets the four limiting conditions:

  • Civil authority action must occur within one mile of the insured business premises.
  • The claim can be collected with a limit of thirty days after a three-day deductible.
  • The premises must have property damage from a covered peril.
  • The access to business premises must be completely prohibited after the damages sustained.

BI Insurance Coverage Criteria

To get coverage from your BI insurer, it should meet a certain number of criteria: 

Income loss 

A company must show proof of income loss for a set time period due to temporary shutdown. 

Physical loss 

A business needs to show proof of physical damage to the property due to unforeseen circumstances. 

Covered Peril 

The perils covered by the policy must cause physical damage to the business. 

Complete Shutdown 

Many insurers controversially interpret the policy as requiring a complete and total cessation of all business operations before any claims will be approved. However, the insured can negotiate a time with the adjuster for repairs i.e. evenings or weekends. This will also allow the business to continue their operations at normal or adjusted hours. This will make things easier for the insured as they will not have to pay much for the claims.

Scheduled limit 

The projected income is specified for the location where the physical loss occurs. 

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Endorsements to Consider

One of the most beneficial features of insurance coverage is that you can add additional endorsements according to your needs. By assessing what risks your business might come across, you can take the time to explore the endorsements that will help you down the line.

Utility interruption coverage 

The majority of businesses need utilities such as water and electricity to function. A sudden interruption of these utilities will force business to close and lead to loss of income.

A sudden interruption of these utilities will lead to income loss and result in the business being temporarily shut down. In such cases, opting for utility interruption coverage to be included in the business insurance policy will help recover from the loss. 

Building ordinance coverage 

A few BI insurance carriers do not provide coverage for losses in income that arise due to building code enforcement. If, by any chance, a building requires time to repair in order to comply with the building code, then in such scenarios, the business interruption coverage will not cover the loss of income. However, if you have the building ordinance coverage, then those losses will be covered.  

Contingent business interruption 

Sometimes businesses are dependent on other organizations to function. In such cases, when the business you are dependent upon closes temporarily or permanently, you suffer indirect damage. Contingent business interruption coverage provides a degree of monetary assistance when a partner or supplier business affects your business thereby covering any expenses you encounter while you find a suitable replacement. 

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BI Insurance Exclusions:

Utilities 

BI insurance does not cover utilities such as water and electricity. If you have to shut your business down temporarily, it is best to call the city services to halt the utilities.

Voluntary closures

When you voluntarily close down your business, you will not benefit from any BI insurance coverage.

Earthquakes and floods

BI insurance generally covers natural disasters. However, earthquakes and floods require separate insurance policies such as earthquake insurance and commercial flood insurance.

Direct property damage

BI insurance does not cover property damages. In such cases, commercial property insurance is sufficient.

Seasonal jumps

A business’s seasonal stagnation and trends are beyond the coverage of a BI insurance policy.

Additional expenses

A BI insurance policy covers the costs associated with a temporary business shutdown. But, it does not cover the expenses related to hiring temporary workers, renting equipment, and overtime payment.

Liability

BI insurance does not provide coverage for lawsuits that come from property damages or third-party bodily injuries caused by your company.

Employee injuries

BI insurance covers the cost of paying your employees due to temporary business shutdown. However, if they injure themselves while working, the medical expenses related to that will be provided by worker’s compensation insurance.

Get personalized business interruption insurance quotes from our wide range of carriers today.

Types of Insurance That Include BI Insurance:

Factors That Determine BI Insurance Premium Costs

The premium costs for business interruption insurance can vary. 

Some of the factors that determine the amount of the premiums are the business size and money required to keep the business operations running smoothly during disasters.  A BI insurance worksheet can calculate these costs depending on the factors. 

Business location 

Business insurance premiums vary according to where the business is located. Given the location, risks associated with that are taken into account. If your business is situated in an area  susceptible to natural disasters, then the cost of premiums will be high. 

Business size 

Businesses with a large area of operations will require more extended construction and renovation times to rebuild the damage caused by disasters. This would raise the costs of the premiums accordingly. Similarly, a business with a smaller property size will have a lower premium cost. 

Business type 

The type of industry a business is in can also affect insurance costs. For example, a construction company might have to pay more than a clothing store given the risks to the employees. 

Business’s claims history 

If your business has a good and clean claims record, then you can have the advantage of paying lower premiums. 

Safety measures for business premises 

If you have proper security devices such as cameras, sensors, or any other devices, it reduces the risks of accidents and damages to your business. Thus, when such hazards reduce, the premiums also decrease. 

BI Insurance FAQs

What is the “period of restoration?”

The period of restoration is a time interval that starts from the day of the interruption and goes until the business has reopened. As per the Central Penn Business Journal, generally there is a 48-hour stand-by period before the BI insurance coverage starts.

How is BI insurance and property insurance different?

Property insurance covers costs when the business takes physical damage. Whereas, business interruption insurance helps recover lost business income and provides funds for business expenses while your business is closed for a temporary duration.

What if I own an e-business? Is BI insurance still necessary?

E-businesses provide a form of service or goods to people mainly through online means. However, your business is also susceptible to a temporary shutdown if your office or warehouse is destroyed. 

Additionally, e-businesses often rely on the use of ISPs, contractors, and vendors for its functionality. So, the potential to temporarily shut down your business is increased if the businesses you rely on are suddenly not functional. In such scenarios, getting a BI insurance policy is highly recommended for e-businesses. 

Additionally, e-commerce businesses are also susceptible to having their systems hacked or compromised. Such a threat can prevent the business from performing their services. In such a situation, a type of BI insurance policy called electronic business interruption insurance would be useful. This policy is likely to be bundled into a cyber liability policy.

In case of a cyberattack to your online business, the reimbursement of this policy will take effect between a period of 1 to 10 days. Any lost income will be covered by the policy until all the affected computer systems are restored. Unlike typical BI insurance policies, this does not have a time limit on how long the insurer will provide funds for lost income.

I work on construction sites, not in an office. Do I still need BI insurance?

Even if you work away from your company’s main office on a construction site, there might be situations where something might happen at your office. Even in that case, work at a construction site will not be halted. However, in the event of a fire or natural disaster that destroys the office, the business will be disrupted somehow.  Recovering all the lost data and equipment will require time and money, taking away resources which could’ve been used to produce more income.

Does my business insurance not include BI insurance?

Your business might have purchased several insurance policies to prepare for unfortunate circumstances. The majority of these policies typically do not cover financial losses resulting from sustaining physical damage to the business. Thus, communicating with your insurance carrier on this matter is essential.

Does BI insurance protect the company from losses due to an epidemic or pandemic?

The COVID-19 pandemic was a curveball no one saw coming. Therefore, the vast majority of insurance policies did not have it included.

As per the report by Globest, if your business closes due to COVID-19, but the building does not have a threat of the virus, then the requirement for direct physical loss is not fulfilled. Therefore, it is not covered. But, if the virus has contaminated the building, then the business interruption insurance will cover the losses. 

Did you find this helpful? Please feel free to drop your thoughts in the comments.

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