What Is Business Interruption Insurance?
What Is Business Interruption Insurance?.
Business interruption insurance is a type of insurance package that covers income following a disaster. This income loss may be a result of physical damage and the resulting rebuilding process, or it may be due to a disaster related closing of the business facility.
This type of insurance differs from property insurance in that the latter only covers physical damage to the business facility, while business interruption insurance also covers the profits that would have been gained. For a business owner, having this policy provision allows you to put the business into the same financial position it would have been had the disaster never occurred.
What is business interruption insurance? There are many different events that can cause a business to temporarily shut down its operations. The frequency of natural disasters in our time has led to growing concern over the preparedness of many businesses to manage operations when faced with disruptions.
Business interruption insurance, also known as business continuation insurance, provides coverage for expenses associated with running a business such as; payroll and utility bills, when the business is unable to operate for an extended period of time because of a fire, or other type of loss as specified in the policy.
While the policy will specify how such expenses are to be determined and how many days coverage will be provided, the amount of coverage is typically based on the company's financial records. Business interruption/continuation coverage can be added to a property insurance policy or purchased as part of a package insurance product.
What is business interruption insurance? Also known as business income insurance, is a type of commercial policy that covers the loss of income that a business suffers after a disaster.
You can skip to the following What is business interruption insurance answers using these links:
- How Can I Get Business Income Insurance?
- What Are The Causes Of A Business Interruption?
- What Occurrences Does Business Interruption Insurance Cover?
- What Does Business Income Insurance Cover?
- Does My Business Need Interruption Insurance?
How Can I Get Business Income Insurance?
Business income insurance is not sold by itself. A commercial property insurance policy offers additional coverage for business income loss by including an endorsement to policy.
This endorsement is designed to protect the insured for losses of business income it sustains as a result of direct loss, damage, or destruction to insured property by a covered peril.
This endorsement means your insurer will pay for actual loss of business income your business sustains following the suspension of operations during a period of restoration.
What Are The Causes Of A Business Interruption?
Remember bad weather is just one of the many causes of disruption and the extent of the disruption often varies. Let's look over a few other causes of business interruption:
- Transport network disruption
- IT outage
- Industrial dispute
- Civil unrest
- Cyber attacks
What Occurrences Does Business Interruption Insurance Cover?
If an occurrence is not covered by your commercial property policy, like a flood, keeps your business from operating, your business income coverage will not kick in. A good example is flood damage - almost all standard commercial property policies exclude flood damage. Unless you have purchased commercial flood insurance, your business interruption policy won't pay your interim expenses and you'll be out of pocket for water damages from the flooding.
What Does Business Income Insurance Cover?
Following are descriptions of some of the coverages and terms in a business income endorsement:
- Actual Loss Sustained: Business interruption insurance may cover the actual loss sustained by the insured following direct physical damage or loss to property by a peril or other event not excluded from the policy. Your insurer is obligated to pay if your business sustained an interruption leading to business income loss.
- Business Income: This includes the net income (net profit or loss before income tax) that would have been gained or incurred by the insurer, and the continuing operating expenses including payroll.
- Period Restoration: Your insurer is only liable for the loss of business income during the period of restoration - otherwise defined as the length of time needed to repair, rebuild, or replace damaged property. This period starts when the physical damage occurs and ends when property should (with reasonable speed) have been restored.
What is business interruption insurance? The expiration of a business interruption policy does not mean an end to the period of restoration. As long as the physical loss occurred during the policy period, the policy will still be valid for the duration of the restoration period. Apart from offering coverage for business income, the property policy endorsement can also provide coverage for events defined as "additional coverage" such as the following:
- Extra Expense: This includes the added costs incurred by the insured during the restoration period that would not have occurred if there had been no physical loss or damage to property. Keep in mind that business owners have an obligation to minimize the extent of any loss or damage, and any expenses incurred in their efforts to reduce the loss are covered as part of business income loss. Typically, the insurer limits these expenses to the point that such expenses minimize the business income claim; however the insurer is not expected to pay any portion of the expense that is higher than the claim itself.
Business interruption insurance policies can also include "extensions of coverage", a section that guarantees the insured coverage against losses stemming from a variety of causes including:
- Service Interruption: This provides coverage against physical loss, damage, or other forms of destruction to gas, water, sewer, telephone, or electrical service. The operators of these facilities are not named under the policy, and there are limitations to this policy. For instance, exclusions of certain perils like tsunamis or earthquakes, or limitations regarding distances are common.
- Contingent Business Interruption: This is meant to cover the insured against losses resulting from damage or destruction of property owned by third parties including suppliers and "receivers" of goods or services provided by the insured. CBI coverage targets the relationship between the insured and their suppliers, and also the customers or receivers of their goods or services.
- Interruption By Military Or Civil Authority: The insured is offered coverage for loss sustained for the time during which access to the business premises is prohibited under military or civil order, and in most cases the time period in this type of endorsement is 14-30 consecutive days.
Does My Business Need Interruption Insurance?
What is business interruption insurance? As illustrated by the various coverage options discussed, there are dozens of considerations that your business must weigh in order to sustain consistent revenue when faced with these challenges. Business interruption insurance will help get you through disruptions that would otherwise cripple your business.
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Get useful tips and information about how much commercial insurance costs, small business risks and exposures, how insurance regulations effect your businesses' and detailed descriptions of coverages and exclusions and more. Most small businesses need to buy the following four types of insurance at a minimum to cover their operations from every day risks:
Property Insurance: This policy covers a business if the property used in the business is damaged or stolen as the result of common perils like fire or theft. Commercial property insurance covers the buildings, structures and also business personal property - which includes furniture, inventory, raw materials, machinery, computers and other items.
Liability Insurance: Any company can be sued. Slip-and fall lawsuits are very common and be costly. Customers can claim you injured them or damaged their property - and lawsuits are very expensive. Commercial liability insurance pays damages and can include attorney's fees and other legal expenses. It also ca pay for the medical bills of injured third parties
Commercial Auto Insurance: For vehicles owned by the business. Commercial auto insurance pays bodily injury or property damage costs for which the business is found liable - up the the policy limits for liability and property damage.
Workers Compensation Insurance: In almost every state employers must provide workers comp when there are W2 employees. Workers compensation pays for the medical care of employees and can replace a portion of lost wages - regardless of who was at fault for the injuries.