David Cribb | Jan 17, 2024
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Small businesses require several different types of insurance coverages, and each has a unique purpose in protecting the business.
As important as business insurance is, it is not something small business owners necessarily think about every day. When it comes to dealing with insurance matters, owners and executives often encounter insurance terms that are confusing or hard to comprehend. For example, business income coverage and business interruption coverage sound alike, and they are often used interchangeably. Which is best for your needs?
We will make it easy for you to understand business income and business interruption, and why both are important parts of a business owners policy.
The primary reason the terms business interruption and business income are used interchangeably is both terms are used in a business interruption insurance policy.
Collectively, they refer to coverage for your buildings and business property and the income you lose if you cannot continue running your business due to a covered loss. Business income coverage is usually part of a business interruption policy.
What separates the two terms?
Business interruption coverage pays for losses that cause damage to your buildings, office equipment, and inventory. You can file a claim to have your building or property repaired or replaced. This coverage will also pay for your business to relocate temporarily or permanently if you cannot get operations up and running at the current site.
By contrast, business income insurance pays to replace the income your business loses if it has to shut down because of a covered loss.
This part of the insurance policy covers the cost of paying your mortgage, rent, or lease payments and wages for employees. It also covers your tax payments, commissions, and certain other fixed costs. Furthermore, business income insurance covers losses where a civil authority forced your business to close.
Another term that comes into play and is related to business interruption insurance is the period of restoration.
Business interruption policies do not pay out for lost business income for a lengthy period. Such policies provide funds on a temporary basis during a period of restoration to allow businesses time to regroup. Insurance companies expect you to do everything within your power to get your business back up and running again at the earliest possible opportunity.
Most commercial insurance companies borrow language from the Insurance Services Office (ISO) form for their business income and extra expense coverage form [PDF].
According to ISO, business income coverage gives business owners a “Period of Restoration” where they will pay to replace lost business income for a covered loss for a limited period of time.
The clock begins ticking 72 hours after the time of the loss and immediately after the time of a direct physical loss or damage that is covered under the extra expense coverage. The loss must have occurred at the location described as the insured’s premises. The extra expense provision refers to extra expenses you would not have incurred if there had not been a loss.
The ending date of the period of restoration is not as specific, and that is by design. It is loosely defined as the period of restoration, which may be vastly longer for some types of businesses than for others.
Business owners must use facts and data to estimate when they can reasonably get back up and running, whether that occurs at the existing location or at another location. Many factors could impact the timeframe, especially if an entire area gets impacted by a natural disaster and building supplies become in short supply.
The amount paid out on your policy is based on your business records. Records should be kept digitally and be readily accessible, regardless of the type of loss.
An insurance claim for business interruption can get complicated quickly. Nonetheless, commercial insurance adjusters will carefully walk you through the claims process.
They will explain what is and is not covered under business interruption insurance, as it may not reimburse you fully for a loss.
Business interruption insurance does not cover the following:
The last bullet point was put to the test during the recent pandemic. According to the National Association of Insurance Commissions, small businesses lost $300 billion per month nationally as a result of COVID-19.
Currently, the insurance industry states business income does not apply to losses related to COVID-19 [PDF].
The amount an insurance company will pay to replace business income is based on your business records. For that reason, it is important to ensure your business records are accurate, current, and complete.
To learn more about how business interruption insurance can protect your small business, contact one of the experts at Leap Carpenter Kemps Insurance Agency.
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