Business Interruption Insurance: Protecting Your Business Against Financial Losses

A business owner’s worst nightmare is having to close the business suddenly because a fire has broken out on the premises. Once the firetrucks have left, there will be many bases to cover—how to keep the business running until the building can be reoccupied, how to pay the employees, and most importantly, how to pay the bills when the stream of revenue halts.

A fire is just one example of a serious event that could cause an interruption in your business. Business interruption insurance could save the day if the worst happens. To that end, we’re outlining what every business owner needs to know about business interruption insurance and how it protects against unexpected financial losses.

What Is Business Interruption Insurance?

Business interruption insurance is designed to compensate business owners if they must shut their business down unexpectedly due to a covered loss.

Business interruption insurance may be included in a commercial policy or business owner's policy (BOP), or it may be available as an add-on to a commercial policy.

What Business Interruption Insurance Covers

Business interruption insurance protects businesses against losses during the restoration period. This is the period of time it takes to get the business back up and running. It covers the following expenses:

• Lost revenue
• Mortgage, rent, or lease payment for your business space
• Loan payments during a shut-down
• Tax payments
• Payroll
• Relocation costs for a temporary location
• Extra expenses are necessary to keep the business running temporarily
• Costs to train employees to learn to operate new machinery or equipment
• Advertising to inform customers of the shut-down

What Business Interruption Doesn’t Cover

As with most types of insurance, business interruption isn’t entirely comprehensive. Policies carry specific exclusions that business owners must be aware of.

Most policies state the following exclusions on a business interruption policy:

• Broken glass or other broken items due to a covered event or loss
• Flood or earthquake damage
• Undocumented income
• Utilities
• Communicable diseases that cause a shut-down

To help make clear the types of situations that trigger business interruption coverage, let’s review some examples. We earlier highlighted an example of a fire breaking out in a business, but other tragedies can occur that can shut your business down unexpectedly.

Common causes of a covered shutdown include fire, hurricanes, tornadoes, and other catastrophic natural disasters. Another situation could be a tree falls on a building making it unsafe for employees or customers to enter. Also, governments and civil authorities may need to close the only road that leads to your business for the safety of the public, forcing you to shut down your operations.

The examples provided here would be covered losses under your commercial insurance policy, and business interruption insurance would apply if you’ve purchased it.

How to Determine the Level of Coverage

The level of coverage you need is based on how much your business stands to lose in the event of a shutdown. Your insurance agent can assist you by reviewing your gross earnings and future revenue projections.

It’s important to estimate figures as closely as possible, as a business interruption policy won’t pay more than the time limit stated in your policy. If the actual expenses are over the limit, you’ll have to pay for them out of your pocket.

In deciding the appropriate level of coverage, consider the following:

• The length of time it would take to recover after physical loss or damage
• Safety measures such as fire alarms and sprinkler systems
• Arrangements that would need to be made when temporarily relocating the business

The cost of business interruption insurance is based on several factors including the following: 

• Type of industry
• Number of employees
• Level of coverage
• Business location
• Degree of potential risks

Businesses that are in geographical areas where natural disasters such as wildfires and hurricanes may have to pay a bit more for coverage.

Tips for Buying Business Interruption Insurance

The following tips highlight some of the most important information business owners need to know about buying business interruption insurance:

• Businesses must have suffered a covered loss.
• Businesses must have actually sustained a financial loss.
• Coverage may be limited to a certain timeframe such as 12 months following a shutdown.
• Many policies include a standard waiting period of 48-72 hours after a covered loss before business interruption coverage begins.
• Claims adjusters may rely on past financial records when determining payment.
• Business interruption insurance should be a topic of discussion at your annual insurance review.

Business Interruption Insurance Protects Against Unexpected Shutdowns

While business interruption insurance may not cover absolutely everything, it may be enough to continue running the business temporarily and minimize your out-of-pocket expenses significantly. In essence, business interruption insurance could prevent your company from going bankrupt and shutting down permanently.

Our commercial insurance agents at Leap Carpenter Kemps are happy to tell you more about how business interruption insurance can protect your business. Give us a call today at 209-384-0727 to learn more and get a quote for your business.