There are a few words that every small business owner barely tolerates to hear: “there was a fire in the kitchen” and “the restaurant is flooded” come to mind- and that’s why business interruption exists.
As you know, small business owners are busy people with many errands on their to-do list; however, sometimes they forget to protect themselves against the unexpected.
Even research shows that one in five start-ups would shut down within 30 days if sales don’t work, yet only 23% consider business interruption coverage. That means any small glitch in the cash flow can put the business on a risky path. Typically, business owners aren’t accurately insuring themselves against common revenue threats.
What is Business Interruption Insurance?
Business interruption insurance, often referred to as business income insurance provides financial support to companies that are forced to close their operations for a while due to a peril that impacted their business assets and property.
Frequently, a business interruption insurance is linked to a BOP (Business Owner’s Policy), which typically also includes property insurance and general liability. And since that’s a common way to receive this coverage, it’s definitely not the only way.
A small business owner can also add this type of coverage to their commercial property insurance policy. For instance, self-employed business owners who work remotely usually add business interruption to validate their homeowner’s insurance policy.
Regardless of how you choose to get this coverage, what matters the most is knowing what expenses and losses business insurance covers and what expenses you’ll need to count on other business insurance policies to cover.
What does it cover?
As we’ve previously mentioned, business interruption insurance is very much linked to your commercial property policy, which means that perils and events generally are covered by your business interruption policy.
Let’s take a look at the multiple costs covered by a business interruption policy.
Actual Loss Sustained
Business interruption coverage is meant to protect against an actual loss suffered by an insured as a result of damage to the insured’s property or direct physical loss by a threat not otherwise omitted from the policy. At this point, the insurance company is only obligated to pay if the company insured suffers an interruption of business, leading to genuine income loss. However, this loss is subject to the insurance limit or submit that is relevant to the specific location where the peril that leads to loss or where the loss occurs.
Typically, an insurer is held accountable for the reduction in net income that issues from the suspension of operations- whether partially or wholly – due to a physical loss at an insured’s location. Usually, insurers consider business income to include:
- Net income (profit and loss before income taxes) that would have been earned or suffered by an insured.
- Normal operating costs suffered, which include payroll, that continues despite the suspension of operations.
Insurers are responsible for the loss of business income only throughout the restoration period, which is often defined as the length of time necessary to repair, rebuild, or replace destroyed or damaged property. A restoration period starts at the moment a physical loss or damage occurs – it typically ends when the property should, with practical speed, be replaced or repaired, and the location is set and ready for normal operations to resume.
When the policy expires, that doesn’t end the period of restoration; as long as the physical loss occurs during this policy period, a business interruption policy has to provide coverage throughout the restoration period.
A business interruption policy in a property policy or added endorsement will deliver additional coverage even for extra expenses. Such extension is meant to cover the insured’s necessary costs during the restoration period that would not have been experienced had there been no physical loss to real or personal assets caused by a covered peril.
When a company income loss happens, an insured is responsible for taking the necessary steps to minimize or prevent it. Any costs experienced to reduce the loss are covered as a part of the business income loss, as long as they don’t surpass the loss itself.
An insurance company will typically not pay if the costs exceed the claim itself. For instance, the insurers will reimburse the insured $100 to minimize the company income loss of $200, however, they will not pay the same amount if the policy is only reduced by $50. Any extra costs exceeding this $50 amount necessary to continue the operations may be recoverable only under an additional expense provision in an insurance claim.
When businesses choose to include a service interruption extension within the policy, this, in turn, provides business income coverage ascending from direct damage, physical loss, or destruction to steam, electrical, water, gas, telephone, sewer, and other utility service’s transmission lines and related substations, plants, and equipment supplying these services to an insured company. Business owners, operators, or managers of these services or utilities are not named insureds within the policy.
Typically, a physical loss, destruction, or damage at the utility or service location usually must be the outcome of a peril similar to those enclosed under the insured’s policy. There are some restrictions on coverage that may apply:
- Distance restrictions, where the actual damage or physical loss of the utility’s property, must happen within a defined distance in relation to the insured’s premises where the organization income loss happens.
- Exclusion of certain dangers such as earthquakes.
- Omissions for overhead transmission and distribution lines.
- A waiting period of 24 or 48 hours during which no policy will apply unless the period of interruption of the operations surpasses the agreed period.
It’s impossible to know when a disaster will hit- but when the unexpected happens, a business interruption coverage can help you protect your business. If you don’t have a business interruption insurance yet, perhaps it’s time to invest in one. Doing so just might turn out to be the smartest move you’ll ever think of.