The complexity of businesses and the noticeable potential for losses due to disasters has led to the rise of Business Interruption Insurance. This is a method of insuring the income of a business in the case of a disaster.
If your business owns property insurance, Business Interruption Insurance is a subset of this type of insurance, and one that any business that relies heavily on its property should consider. Keep in mind that Business Income/Business Interruption insurance only responds from a covered cause of property loss. Business interruption due to a fire is normally covered, business interruption due to a flood normally would not be covered.
Read on to understand if this type of insurance is right for your business.
Also known as Business Income Insurance, this coverage insures the revenue losses a business might suffer in the case of a disaster. Many business owners assume that the Property Insurance they already own will cover their lost revenue, but they’re wrong.
Specifically, these policies work on the idea that any business that generates income due to its physical assets (machinery, land, vehicles, etc.), will lose income potential if those assets suffer some form of disaster. While Business Property Insurance covers the value of those physical assets, it does not cover the lost revenue potential. In some cases, this has led to businesses losing so much income that they have had to shut down. This is particularly the case for businesses whose largest share of income is generated directly by physical assets, and for whom the loss of these assets for any extended amount of time means a complete or almost complete inability to generate income. Both business who rely on income from selling physical products (such as wholesalers) and business who rely on foot traffic (retail stores, restaurants) need Business Income insurance.
This insurance is focused on the “period of interruption”, and the “estimated profit loss” during this period. The “period of interruption” is the period of time after a disaster has occurred during which the physical assets needed for business operations are not generating income. For most businesses, this inevitably results in lower profits. For some businesses, this profit loss is too much to bear, particularly if that business is heavily reliant on the physical assets that were lost.
For example, a small trucking company, may have to shut its doors if a sudden fire or tornado hits its lot, taking many of its vehicles out of service for weeks or months. Covering the cost of the property is important. A trucking company that is not moving material or goods is not generating revenue. The small profit margins that many trucking companies operate with could mean the shuttering of the business.
As an additional example Business income insurance would allow a restaurant to re-open after suffering a fire loss. Damage as a result of a fire is caused by flame damage, smoke damage and damage from the fire department extinguishing the fire. Restaurants can be out of business for several months while construction permits are filed, contactors re-build the damaged portions of the restaurant and the department of health approves the restaurant is ok to serve food. A restaurant that suffers even a somewhat small fire loss is in danger of going out of business as a result of the lost income from the lack of customers while recovering from the fire.
An extended period of interruption without a policy that insures income means that a business may still get the cost of their physical assets recouped. However, this will not cover the loss of income for the weeks or months it takes to rebuild the business, pay the lease, cover other insurance costs, pay business taxes, pay employees or cover any other expenses that are common with running a business.
Getting into details...
Coverage for businesses that house a lot of personal consumer data. Example Covers the profit losses that can occur when a business must shut down services due to a security breach.
Coverage for businesses that produce goods sold to consumers or other businesses. Example Covers the profit losses that occur as a result of a product recall. Covers the lost profit potential of these products.
Coverage for when customers are unable to gain access to a business due to government (local or federal) shutting down access to that business or its services. Example Covers the profit losses that occur as a result of a business’s inability to reach its customers due to government actions.
Coverage for when damage has occurred to the physical premises of a business to such a degree that operations must be shut down for an extended period of time. Example Covers the profit losses that occur as a result of physical damage that leads to inoperability of the business’s primary base of operations.
Coverage for when other property related to the business’s income stream has been damaged and rendered inoperable. Example Covers the profit losses that occur as a result of physical damage to property essential for a business’s income stream.
Contingent Business Interruption will come in handy if your business:
Business Interruption Insurance policies are extremely limited in what they will provide as well as when and how much they will pay out. A business interruption claim is limited specifically to disasters that occur to assets that the business holds that cause distinct and noticeable profit losses for an extended period of time. Interruptions that are short-lived, or that do not result in a significant amount of profit loss, would not be acknowledged as legitimate business interruption claims. While there is no specified percentage or amount that is considered significant, terms vary and are set in agreement by the insurance company and the policyholder.
This type of insurance is limited to either your business’s projected gross income or your net profits. It does not cover all expenses, however. Property with depreciating values may negatively impact the payout amount. There will also be a waiting period between when the claim is filed, and when the expense coverage is paid out. Likewise, the full amount of expenses will not be paid out if the funds are not being properly allocated toward the recovery of the business.
The cost of coverage will vary based on the business and its projected profits. Insurers will use tax forms to help make this determination. In the situation that a business’s original policy covers far more than their actual profit, an insurer may adjust the amount of payout downward to better match the actual profit attained during a certain period. Coverage also has a limited payout time. Most coverage periods do not last longer than 12 months, with many lasting for no more than 60 to 180 days. This is particularly true for payroll expenses. Finally, expense payouts are not retroactive. After the several day waiting period, policies will not cover any expenses that were incurred during the waiting period, even if that period accounts for a large percentage of the total period of interruption.
Business Interruption Insurance covers the gross profit loss during the period of interruption, or the period of “restoration”. This is the time period where operations are interrupted due to the loss of physical assets, and those physical assets are either in the process of being repaired or being replaced. Generally speaking, policies will cover the gross profits, but subtract the amount your business pays toward expenses that you don’t incur when your business is shut down. Alternatively, some policies will cover the net profits, and include any expenses that continue to pile up, even after the business has closed. Although many insurance companies recently changed the terminology to fit the latter, calculations using either term have the same end result.
Most policies differ only in the amount of coverage a business has purchased. The coverage is based on profit, which can make determining the amount of coverage difficult. This is because profits can vary month over month or year over year. Most policies differ only in the amount of coverage a business has purchased. The coverage is based on profit, which can make determining the amount of coverage difficult. This is because profits can vary month over month or year over year.
Most insurance companies allow the gross profits to be projected from the time the policy is enacted. This allows businesses to better cover their costs without having to re-evaluate how much insurance they should be purchasing on a month-to-month basis. Most policies will also cover payroll expenses. This allows businesses suffering a profit loss due to a disaster to keep employees on the payroll during the period of interruption and the period of recovery.
Costs for these policies can vary greatly. The biggest impacts on Business Interruption Insurance cost will be the size of the business and the amount of business income needed to keep the business running should a disaster occur. Carefully consider the number of physical assets your business has that are tied directly to your profit stream, as well as the amount in expenses that would have to be covered in the post-loss situation. This can be done by completing a Business Interruption Insurance worksheet. This amount will differ for every business.
Because your business has not been physically damaged by a covered peril, Business Interruption insurance will not cover the loss associated with one of your suppliers shutting down. However, if you have added Contingent Business Interruption, there is a possibility that you can find coverage here. Check with an advisor and understand all of the available coverages to you.
Be sure to have Business Interruption coverage on your policy, and you will still be able to have an income if your business is damaged by a covered peril. These perils are often the same as what your Commercial Property policy and include things like fire, wind, theft, etc.
Yes, payroll can be covered here so that you do not lose out on those key employees due to an unforeseen incident.
A claim that you have reported where your income will suffer due to having to shut down your business because of a physical damage incident. Again, it has to be due to a covered peril.
This specialized insurance policy covers liability associated with pollution. An Environmental Impairment policy may also cover cleanup costs.
This type of insurance helps you cover the losses resulting from criminal acts such as robbery, burglary and other forms of theft. Many businesses choose Crime Insurance policies that allow them to file claims for internal theft or other offenses with the potential to cause financial problems.
This plan covers an employer in the event of an errors or omissions claim from an employee around a benefits plan. Errors and omissions covered in this plan can include failure to advise an employee of benefits they are entitled to, failure to enroll an employee, and giving incorrect advice in regards to benefits.
A Fiduciary Bond and a Fiduciary Liability policy are two separate things, but they also work together to protect your business’s retirement plan or pension fund. The bond protects the plan from losses due to dishonesty or fraud while the liability coverage provides protection in the case of breach of fiduciary duty on the part of the plan managers.
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