Business Interruption Insurance: What It Can and Cannot Cover
Business Interruption Insurance (also called Business Income and Extra Expense Insurance) is designed to cover lost income when you have to close your business temporarily because of events beyond your control. It’s an extra layer of protection that goes beyond more common insurance policies like Property Insurance.
For example, if your office catches fire, 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, can cover that income.
A typical Business Interruption policy can provide coverage for three things:
- The profits you would have earned if the incident did not occur.
- Normal operating expenses, even though the business is temporarily closed. This includes your employees' wages so you can keep them on staff during the interruption.
- 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 records about your business income and expenses. Store these records in a safe location, preferably off-site and/or digitally.
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 operable again.
Business Interruption Insurance is often 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 purchased as part of a BOP than as a freestanding policy.
What Business Income Insurance Can Cover
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. Businesses are still required to pay taxes, even when disaster hits. This can help you pay your taxes on time.
- Loan payments. Loan payments are often due monthly. Business Interruption coverage can help you make those payments even when you can't generate income.
- Losses caused by 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."
Business Interruption Insurance Exclusions
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 is not the case.
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. Unless you have a flood insurance endorsement as part of your Property Insurance, your Business Interruption policy won't help cover your interim expenses, and you must cover water damages out of pocket.
Let’s look at some other expenses Business Interruption coverage can’t address.
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 usually won't provide coverage for:
- Utilities. In most cases, utilities aren't covered because utility service is typically stopped 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 unaccounted income.
- 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 to operate and remain open for customers.
- 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 items 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 before committing to coverage.
Small business owners familiar with their policy have the best chance of receiving coverage when they need to file a claim. Insureon’s agents are licensed in every state and can help you determine the right policies for your business. Apply for free quotes today.