Business Interruption Insurance: What it Can and Cannot Cover
Every insurance policy has exclusions and limitations, and Business Interruption Insurance is no exception. Its name may suggest that it covers any event that causes your business to close its doors, but that's just not the case.
Stated plainly, if an event not covered by your Property Insurance policy (e.g., a flood) keeps your business from operating, your Business Interruption coverage cannot help you meet your expenses. For example, most standard Commercial Property Insurance policies exclude flood damage. So unless you have a Flood Insurance endorsement as part of your Property Insurance coverage, your Business Interruption policy won't help cover your interim expenses and you'll be stuck paying for water damages out of pocket.
To help keep you afloat during times of business interruption, let's examine common inclusions and exclusions for Business Interruption Insurance.
What Business Income Insurance Can Cover
Often included in a Business Owner's Policy as part of its Property coverage, Business Interruption Insurance offers benefits when a covered property event forces a business to close down temporarily.
A typical Business Interruption policy can provide coverage for:
- Revenue. This is the income your business would have earned during the closure period if it were operating normally.
- Rent or lease payments. Many leases require the renter to continue making payments even if the premises become unusable. Most also exclude renters from any insurance a landlord has, so you need to rely on your own coverage.
- Relocation. This is the expense of moving your business to a temporary location and may include both moving and rent costs.
- Employee wages. This is essential if you don't want to lose employees while you're shut down. Your coverage can help you make payroll when you're unable to operate.
- Taxes. The taxman doesn't stop collecting, even when disaster hits. This can help you pay your taxes on time.
- Loan payments. Loan payments are often due monthly, so your coverage can help you make those payments even when you can't generate income.
- Losses caused by covered damage that prevents access to a building. For example, this coverage can help out when the government implements a citywide curfew or other restrictions that keep people away from your business. This is usually called "civil authority coverage" or "loss of ingress or egress." (To learn more, read our blog post "City Curfews and Business Interruption Insurance: Coverage Varies.")
What Business Interruption Insurance Can't Cover
Say your coffee shop is damaged by a fire and forced to temporarily close its doors. Even though a fire usually falls under events covered by Property Insurance, your Business Interruption Insurance won't pay for every cost your recovering business may incur.
Your Business Income Insurance policy probably won't provide coverage for:
- Utilities. In most cases, utilities aren't covered because utility service typically shuts off when the location can't be used for business.
- Income that isn't documented. If your business is steadily growing, it's important to document several months of revenue so the insurance company can compensate you adequately. You won't be reimbursed for income that's unaccounted for.
- Losses from partial closures. If access to your business is limited but not completely eliminated by property damage, you usually can't receive Business Interruption benefits. For example, say a windstorm causes a tree to fall onto your business's stockroom. While your stockroom's roof needs repairs, you're still able operate and remain open for customers. Learn more about that in the blog post "New England Snow and Business Interruption."
- Losses from closures caused by non-covered damages. As mentioned earlier, most Property Insurance policies don't cover flood damage. The same goes for earthquake damage. And remember, you can't receive income coverage when you voluntarily close (e.g., for a family emergency or vacation).
- Closures from downed power lines. If a storm or accident results in downed power lines, most closures are not covered. Power outages are a common occurrence, making it a difficult risk to insure because it affects so many people. Power is typically restored quickly, and most Business Interruption policies require a business to be shut down for at least 72 hours before benefits kick in.
Don't Let the Fine Print Take Your Business by Surprise
Insurance terminology can be tricky to interpret, but don't gloss over these three things in your Business Interruption Insurance policy:
- Waiting period. The wait to receive coverage can be surprisingly long. Most policies make you wait at least three days (72 hours) before your benefits kick in.
- Proof of loss. You have to prove that your business suffered financial damage after an interruption, which can be difficult. Check to see what proof your policy requires and carefully document your day-to-day affairs – even while operating normally – so your insurer has a point of reference.
- Unique coverages. If you've had multiple carriers over the years, you may be unaware that coverage can vary from policy to policy. Insurers use unique coverage add-ons to differentiate their product from the competition. Look at a sample policy form prior to committing to coverage.
While it's easy to blame insurance carriers for denying claims, the truth is that the terms of coverage are spelled out in the fine print. If you don't fully understand your policy, talk with your insurance agent to clear up any questions. Small-business owners familiar with their policy have the best chance of receiving coverage when they need to file a claim.