What Does Business Interruption Insurance Cover?

Business interruption insurance, also known as business income insurance, is a critical component of a comprehensive business insurance strategy. While a commercial property insurance policy will pay to repair or replace your business’s physical assets after a fire or a storm, it will not cover the financial losses you incur while your business is closed. That’s where business interruption insurance comes in. It provides a financial safety net that allows a business to continue paying its bills and its employees during a period of temporary closure.
What Business Interruption Insurance Covers
A business interruption policy is designed to cover the financial losses a business experiences when it is forced to close due to a covered event. The coverage typically includes:
Lost Income: This is the most important component of the policy. It replaces the net income (profit) that your business would have earned if it had been able to operate as normal. The amount of lost income is typically determined by a review of your business’s financial records from the period before the interruption.
Operating Expenses: The policy will also cover your ongoing operating expenses, even if you are not generating income. This includes expenses such as:
Rent or mortgage payments
Payroll and employee wages
Loan payments
Taxes and utility bills
Extra Expenses: This is an additional benefit that covers the cost of getting your business back up and running as quickly as possible. This can include the cost of moving to a temporary location, new equipment, or overtime to meet production deadlines after the business reopens.
Civil Authority Coverage: This is a specific type of coverage that will kick in if a civil authority, such as a government or a law enforcement agency, prevents access to your business. For example, if your business is in a location that is subject to a mandatory evacuation order due to a natural disaster, this coverage will provide a financial safety net.
Common Exclusions and Limitations
While business interruption insurance is a powerful tool, it does have a few common exclusions and limitations that you must be aware of:
Physical Damage: A business interruption policy is almost always tied to your commercial property insurance. This means that a claim for business interruption will only be paid if the cause of the interruption is the result of physical damage to your property from a covered peril. For example, if a fire destroys your building, both your commercial property and business interruption policies will be triggered.
Waiting Period: Most policies have a waiting period, typically 24 to 72 hours, before the coverage will kick in. This is to ensure that the policy is used for a true business interruption, rather than a minor inconvenience.
Exclusions: Common exclusions include losses from:
Viruses or communicable diseases: Most policies explicitly exclude losses from a pandemic or a viral outbreak.
Flooding or earthquakes: These are often excluded and require a separate policy.
Power outages: Unless the power outage is caused by a covered peril, such as a fire that damages a power grid, it is not covered.
In conclusion, business interruption insurance is a crucial financial safeguard that ensures your business can survive a catastrophic event. By understanding the coverage and the exclusions, a business owner can ensure that they are prepared for the financial risks of an unforeseen event.