Business Interruption Insurance: Coverage & Compensation

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Depending on what part of the country you live in, you may be concerned with what happens to your business in the event of a natural disaster. The truth is, no matter where your business is, there is always a possibility that a major disaster will impact your business or force you to close your doors for a period of time. The good news is there is insurance for that. Business interruption insurance protects you from revenue loss in the event of a disaster.

Business interruption insurance can be purchased as a standalone policy or added to your Business Owner’s Policy (BOP).

What Does Business Interruption Insurance Cover?

When you add business interruption insurance to your business owner’s policy, you have coverage for actual loss sustained. Actual loss sustained is the total of all costs or losses your business experiences from the claim. Frequent losses include:

  • Loss of income: There are a number of scenarios that can cause you to lose revenue or income to your business including fires, natural disasters, or civil interruption. Business interruption insurance will reimburse your lost income depending on how long you close. Some policies include coverage for up to 12 months but can limit to 3, 6, or 9 as well.
  • Fixed cost expenses: Just because you are forced to close, doesn’t mean the bills stop. Fixed cost expenses like rent, employee wages, business insurance, and taxes still need to be paid. Business interruption insurance will also cover these necessary costs while you close.
  • Relocation expenses: In some scenarios, businesses relocate to a temporary office or location to continue their work. Relocation expenses like hiring a mover, additional temporary help, and new rent costs are generally included in the business interruption coverage.
  • Temporary expenses (Extra expenses): Temporary expenses or extra expenses are outside of the fixed expense category and occur because of the incident that forced your business to close. They can include advertising costs to announce your temporary closure or new location.

Business Interruption Insurance Compensation

Making sure you are adequately covered for a business interruption is a tricky task. You may have seen reference to business income worksheets, or business interruption profit forms. These are mainly applicable to larger businesses to calculate possible losses, as well as the amount of time it will take them to get up and running to normal business operations (restoration period).

Small businesses can estimate their coverage need by following these four steps:

  • Calculate income from the past 12 months
  • Re-calculate that income by including a percentage for growth
  • Determine your existing fixed costs
  • Estimate additional costs like relocation and advertising expenses

One important thing to remember in the event of business interruption is that coverage won’t start immediately. Most policies include a waiting period (similar to a deductible) that delays coverage for 72 hours after an incident.

When a business interruption claim does occur, your insurance company will assign an adjustor. The adjustor will review your financial statements in addition to how the incident has impacted your business to determine the amount reimbursed to you. It is important to keep a detailed record of all financial transactions before an event and after an event to make sure you don’t experience any out-of-pocket costs.

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