Business Interruption Insurance: How It Works
Events that cause a business to temporarily stop operating have increased in number as well as severity. In this decade alone, some of the most severe natural calamities in remembered history have hit various parts of the globe: the ash cloud caused by the eruption of Eyjafjallajkull in Iceland, the tsunami that devastated Fukushima, Japan, and Hurricane Sandy.
Such disasters may not affect a business directly, but if one of your suppliers or shipping routes is located in an affected area goes through these areas, your business will suffer some losses.
But weather is not the only source of disruption. The Business Continuity Institute regularly reports on the most common causes of business interruption aside from adverse weather and natural calamities.
From most to least frequent, these causes are…
- Unplanned telecommunications or IT outage.
- Transport network disruption.
- Outsourcer failure.
- Loss of skill or talent.
- Product quality incident.
- Civil unrest.
- Industrial dispute.
- Cyber attacks such DDOS attacks and malware.
Typical Business Interruption Insurance Coverage
Business Interruption Insurance (officially called Business Income and Extra Expense Insurance) is designed to cover the income you lose when you have to close your business temporarily because of events beyond your control. It is an extra layer of protection that goes beyond more common insurance policies like Property Insurance.
For example, if an establishment is burned down, Property Insurance can be used to cover the damages, but it won't cover the potential income lost. Business Interruption Insurance, on the other hand, will cover that income.
A typical Business Interruption policy will provide coverage for three things:
- 1. The profits you would have earned if the incident did not occur.
- 2. Normal operating expenses even though the business is temporarily closed. This includes your employees' wages so you can keep them on staff rather than firing them and hiring untrained replacements when you're ready to reopen.
- 3. The expense of moving your business to a temporary location.This might include both moving and rent costs.
The payout amounts you receive from your Business Interruption Insurance are based on historic records about your business' income and expenses – so store such records in a safe location, preferably off-site and / or digitally through the Internet.
Business insurance providers include clear clauses in the policy concerning what will trigger Business Interruption coverage. In general, coverage starts a few days after the incident and lasts until your affected business location becomes usable again.
Often, Business Interruption Insurance is included as part of a Business Owner's Policy (BOP), which is a package for low-risk businesses that includes General Liability Insurance and Property Insurance. In fact, Business Interruption Insurance is more often found as part of a BOP or other policy than as a freestanding policy.
Useful Add-ons for Your Business Interruption Insurance Coverage
Certain businesses may require protection beyond what a standard Business Interruption policy offers. For these businesses, certain add-ons are available. These include…
- Extra Expense Insurance: If your usual facility is less expensive than the one you are temporarily renting while the other is being repaired, interruption insurance pays for the old rate while the "extra expense" rider accounts for the rest.
- Contingent Business Insurance: This is for indirect causes like when your supplier is affected by a calamity. In such cases, there may be no direct damage to your business but you might still be forced to stop operating temporarily until you can find a new supplier.
For your business to earn a profit, it must operate. Interruptions can lead to losses and even, in some cases, permanent closures. Business Interruption Insurance can help tide you through an unexpected calamity safely so you can resume operations.