How Does Business Interruption Insurance Work?

Business interruption insurance covers your actual business from the loss or damage to your income due to a loss at your business.  Let’s look at an example of a real business situation to define the key elements of how business interruption insurance works.

Bill and Sally opened a coffee shop and bakery in a leased space downtown.  The income is generated through take out goodies as well as some sit down business at their location.  They have several freezers for storage and service, a storage area for paper goods, restrooms, and small retail and sitting area for their customers.  The shop averages $700 a day and monthly does about $21,000 in revenue.  The shop nets about $1,500 a month not including salaries paid to both Bill and Sally.  Their lease is in year 3 of a 10 year contract with an option.

A fire in the building destroys the shop. While this fire started in another area, the lease specifies each tenant have property insurance. A claim is submitted to the property insurance.  However, to maintain the space, utilities need to be paid, equipment loans paid, minimum orders are required by several vendors to maintain the business.

A contractor is hired, and new freezers and equipment ordered.  Still, it will take 6 weeks or more to get up and running.  No revenue is being generated, which also means Bill and Sally have no income.  This is a tough scenario for any married business owners working together.  There is the stress of the loss of the physical business and equipment, loss of income, and financial pressure..

However, their commercial insurance broker added Business Interruption insurance to their business insurance coverage.  This insurance will cover the loss due to time, quantity and other values. Bill and Sally submit a claim based on actual business records of losing $31,500 in revenue and profits of $2,250.  Now, the shop has this covered as well as the property insurance claim, allowing them to get through to re-opening the business.

Many businesses are forced to close for good by not preparing for the down time and revenue loss.  Have you spoken with your commercial insurance broker about business interruption insurance?

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