Business Interruption Insurance 101

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Does Your Insurance Policy Include COVID-19 Business Interruption Insurance?

Due to efforts to slow the spread of COVID-19, the novel coronavirus, in the United States, thousands of businesses around the country are reducing activity or closing indefinitely to keep workers and customers safe at home.

While these actions promise to have a positive effect on the nation’s health and our healthcare providers, small business owners can’t ignore the economic impact of weeks of lost revenue.

Usually, when an unexpected disaster strikes and forces business closure, small business owners can turn to business interruption insurance to help pay for a covered loss. Some states are considering requiring insurance companies to cover pandemic-related losses, which normally aren’t included in policies.

Here’s what you need to know about business interruption insurance and covering your losses this year.

What Is Business Interruption Insurance?

Business interruption insurance is a business insurance policy designed to protect your business in case you’re forced to shut down for a period due to disaster. It’s sometimes known as business income insurance or business income and extra expense insurance.

You may have business interruption insurance as a standalone policy or as part of a packaged policy, such as a business owner’s policy or multiple peril policy.

What Does Business Interruption Insurance Cover?

Generally, business interruption insurance helps you cover costs and lost revenue due to a covered event such as a natural disaster, fire, hurricane, theft, or other disruptive events. Typically this coverage is for a specified length of time.

You can add several types of coverage to a policy, including:

  • Lost income/profits: This is the money your business could have earned absent the interruption.
  • Operating expenses: Expenses such as rent or mortgage, utilities, and other fixed costs can be included. Some policies also cover moving to a temporary location, training employees on new equipment and other costs you incur to continue operating.
  • Payroll/income coverage: Business interruption coverage should cover employee wages or salaries to help you retain employees while not doing business.
  • Taxes: If taxes come due while you’re out of operation, your insurance policy may cover some costs.
  • Debt repayment: If you are repaying a loan, business interruption coverage could help you stay on top of payments while not earning revenue.

Typically, business interruption policies do not cover:

  • Physical damage to the property. 
  • Injury to employees.
  • Physical damage to company vehicles.

For these issues, you need additional types of commercial insurance for your business: commercial property insurance, workers' compensation insurance, and commercial auto insurance. Business interruption insurance also can’t replace revenue the business is losing because of its own failure. The payout amount is usually based on previous months’ revenue.

So WHY do you need coverage?

Example #1: Unfortunately, a tornado comes through your town and causes significant damage to your business. Because a tornado is a covered peril on your policy, it helps cover the cost to move to a temporary location as well as a loss of income, loss of profit, and any extra expenses.

Example #2: The same storm knocks down a powerline a couple of blocks away and another business starts on fire. Luckily, the business has property insurance to cover the damages/repair. However, they didn't have business interruption coverage as part of their BOP. So while their building is being rebuilt, any extra expenses or loss of income incurred is NOT covered by their insurance. They have to eat the loss of income during the months it may take to rebuild.

These two examples on different ends of the spectrum showcase the need for this coverage—and it often doesn't add much to the overall package cost.

Other Business Insurance Policies to Invest In

A small business can obtain a business owner's policy (BOP) that will often include general liability insurance, commercial property insurance, AND business interruption insurance.

  • General Liability Insurance: General liability insurance provides coverage for third party bodily injury or property damage and commonly includes coverage for libel or slander.
  • Commercial Property Insurance: If your business is located on a property that you rent or lease, you'll need property insurance to protect the structure and products/equipment stored within.
  • Workers' Compensation Insurance: If you have employees, you're required to obtain workers comp to cover their lost income and medical expenses if they become ill or injured on the job.

How Much Does Business Interruption Insurance Cost?

Like most insurance, how much business interruption insurance costs depends on the amount of risk the provider takes on. That’s determined by things like:

  • The size and nature of your business
  • Amount of coverage requested
  • The risk of disaster(s) in your area

The average annual cost of business interruption insurance nationally is $1,200, according to HowMuch.net, but premiums vary significantly depending on your circumstances.

How Much Business Interruption Coverage Do You Need?

How much coverage you get depends on your business needs, so there’s no one-size-fits-all policy. Speak with an insurance agent about your business to determine your coverage needs, considering:

  • Average monthly revenue
  • Business operating costs
  • Amount you pay in employee wages
  • Your typical cashflow
  • Your company’s runway (how long you could operate with the cash you have)
  • Amount you have in savings

As with any insurance, the more coverage you want, the higher premium you’ll pay. But be careful not to underestimate your need just to cut costs — you’ll want sufficient coverage if you ever have to tap into it.

Business interruption insurance can offer peace of mind to any small business owner, but coverage can be complicated. It could cost just $1,200 a year, though, which could be worthwhile to keep your business afloat in case of the unexpected. 

Coverage for Coronavirus-Related Interruptions

Business interruption policies are generally only effective if you can’t operate due to property loss or damage, in which case pandemics aren’t covered. Some policies even explicitly exclude pandemic or epidemic-related coverage.

That means if your business has had to close or reduce production because of Coronavirus-related events, your policy probably won’t be triggered.

However, the National Law Review reports, some state legislatures are taking steps to mandate business interruption insurance coverage for a Coronavirus-related loss. Keep an eye on business news in your state for potential updates that could affect your coverage.

Some business interruption policies also cover financial losses that occur because civil authorities limit access to an area after a disaster. If your policy includes this coverage, speak with an insurance agent to determine whether coronavirus-related losses qualify.

Get a Free Business Interruption Insurance Quote

Our insurance specialists understand that every small business is unique, and we can help you understand your insurance options and translate your needs into affordable coverage. To get a competitive insurance quote, complete the form at the top of the page or give us a call at 1-877-907-5267.

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