Should I Get Business Interruption Insurance?
When business owners think of property insurance, they typically consider coverage for their building or the contents inside their office or shop. They might not know that business interruption falls under property coverage as well, and it’s an important one.
This coverage is also known as business income insurance. It’s also not a property coverage per se, even though that’s where you’d find it in the policy. Yet, no matter what you call it, your business needs it. The following will be a brief, general overview.
Business interruption provides coverage for your company if you lose income because of a covered cause of loss. Whether you own a brick and mortar store or an apartment building, this could help you if your business must temporarily close.
A key thing to note in that prior paragraph is “covered cause of loss.” If the event that caused your business to close for a week isn’t covered by your policy, the business interruption doesn’t respond. This is all very simple to understand, though it’s not always easy for insureds to know what’s covered and what isn’t. In situations like that, get in touch with your agent. If you’ve been involved in a claim, the insurance carrier can offer clarity there.
Business Interruption: What’s Covered
When we say that this is coverage for loss of income, that’s quite broad. Under the ISO Businessowners Coverage Form, this is called “Business Income.” It goes on to say that your expected net income and ordinary payroll expenses are key components of the coverage. You prove what your expected net income would have been through recent financial statements. Payroll expenses are for your employees, exclusive of corporate officers; the policy covers it for sixty days.
Business interruption coverage is normally subject to a “time deductible” or waiting period. (It’s not really a deductible, but some think it is.) If your business closes down for a day because of a covered loss, there will probably not be coverage. These waiting periods say that the business must be closed for a certain amount of time before a policy will pay. 24 to 72 hours is the usual range.
The maximum amount of time this coverage will continue is for 12 months after the initial loss.
Business Interruption: Extra Expense
A nice feature of the businessowners policy is that both business income and extra expense are covered. The latter is insurance for costs incurred to get operating faster. This can include setting up a temporary location somewhere else and replacement property, such as essential machinery to restore the business. Extra Expense is not subject to a waiting period.
Of course, as is the case in any claim, insureds should make an attempt to mitigate any further loss. This includes business interruption claims, and believe me, the insurance company wants you back up and running as soon as possible.
Business Interruption: How Much Do I Need?
We always recommend that you review your coverage and limit options with your preferred insurance agent or broker; our disclaimer spells this all out.
In preparation for that, ask yourself how much money your business would be out if you had to shut down for a year. It’s particularly important to get this right if, for example, you have a restaurant or store. A plumbing contractor who is doing jobs off-premises all the time doesn’t have the same exposure for a loss to their office as a restaurant would for their doors closing for an extended period. Yet, some insurance companies consider business interruption for down vehicles as well. If you’re a plumber with one truck, and your truck is totaled in a covered crash, that’s a big exposure, and ask your agent if it can be insured.
Those with a businessowners policy, I have good news: you already have business interruption insurance. Unless somehow it was excluded, this policy automatically includes business income coverage on an “actual loss sustained” basis. You are covered for 12 months up to the actual amount of loss you take, making it nice and easy. On a commercial package policy, however, you and your agent must set a dollar value limit. A good starting point would be your sales numbers for the past year. If, for example, your business made $1 million in the course of one year, that’s a reasonable estimate for a business interruption limit. There are, however, other considerations, such as ongoing expenses.