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Do I Need Business Interruption Insurance?
When shopping for insurance for your business, you may be offered business interruption insurance as a complement to your property coverage. When your business experiences a covered peril, there are costs you may incur beyond just the property damage. Your business might not be able to operate or it may have additional expenses. During the period of interruption, you’ll be facing these higher costs and lost revenues – a double whammy. In certain situations, business interruption insurance can help cover some of these losses.
Related: COVID-19 Small Business Resource Hub
This article is not legal or insurance advice and is intended to be informational only. Biz2Credit and the writer are not liable for the guidance provided. Consult with a licensed attorney or insurance broker for advice specific to your business.
Business interruption insurance coverage often covers the following types of expenses that your business might have during a covered physical event.
Normal operating expenses: Rent payments on an office space you can’t use and payroll costs for employees that you can’t put to work during the interrupted period
Extra operating expenses: Higher operating costs or extra expenses due to the disruption such as relocation expenses
Lost Profits: Loss of income during the interruption period
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What is an example where business interruption insurance is useful?
Imagine you have a business that makes chairs. Your business has a fire and can’t produce chairs for 6 weeks until it finds and relocates to a new location. The business interruption coverage would help your business relocate to a temporary location where you can resume making chairs, reimburse you for your financial loss during the period when business is suspended, and pay for extra expenses you incur while you try to get your business back on its feet.
Business interruption insurance provides coverage for common “covered losses” (but each policy is different and you should examine yours carefully):
- Sewer backup
- Wind damage and windstorms
But what will cover my business’ property damage?
Business interruption insurance is often bought as a “bundle” with other policies that your business needs like a Business Owner’s Policy that covers Property and Liability. Physical damage will usually be covered by your commercial property policy (if you own the building) or commercial renters insurance (if you are a tenant).
Many different types of businesses can find business interruption insurance useful. Some characteristics of businesses that may need business interruption insurance include:
- Businesses with slim margins – if your business would go under due to a few days or weeks without operating, business interruption coverage may be able to help your business stay afloat
- Businesses that are at higher risk of covered events – if your business is in an area prone to wildfires or vandalism or other covered events, an insurance policy may give you peace of mind. Of course, the insurance company also knows that your business is at risk of this event, and so they will price the policy accordingly
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How much does business interruption insurance cost? Business interruption insurance is priced according to the characteristics and riskiness of your business.
The pricing of business interruption insurance depends on different factors including what industry you are in, the location, and the level of coverage you want to buy. Ultimately, the insurance provider will be pricing out your “risk” or the chance that they will have to pay out on a claim. When deciding how much business interruption insurance to buy, consider your business’ “worst case scenario.” How much would it cost to relocate or reboot your business and how much revenue would you lose under that scenario?
There are a few things that business interruption insurance does not cover.
- Utilities that you are no longer paying after you have evacuated the building
- Business income that is higher than the “covered amount” on your policy
- A recession or a decline in demand for your product
- Lost income you haven’t documented in your financial records
- Certain excluded events (like floods, earthquakes, or pandemics) – in some cases these could be covered if you have a special endorsement or rider
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Does business interruption coverage cover losses relating to the coronavirus (COVID-19) epidemic?
Usually no. Most insurance policies require a “direct physical loss” – such as damage caused by a fire – before they will pay a claim. There are debates about whether the virus can be considered a direct physical loss if it manifests on a surface, for example, that can’t be used, but the general consensus is that insurance companies will “swiftly deny such claims.” In addition, most business interruption policies exclude pandemics or infectious disease outbreaks in their policies. After the SARS outbreak in 2002-2003, many insurance policies started to explicitly exclude pandemics. According to Brian Evans, the CEO of Eastern Public Adjusters, LLC in New York City, “Many property policies now contain specific exclusions for property damage arising from viral or bacterial losses.”
The insurance industry doesn’t insure pandemics because they consider them uninsurable, claiming that the losses are too large to justify any policy. In a statement, David Sampson, the president and CEO of the American Property Casualty Insurance Association (APCIA) said, “Pandemic outbreaks are uninsured because they are uninsurable.”
However, some insurance policies in niche instances do cover pandemics. For example, Wimbledon has pandemic coverage in their insurance policy. And some states are considering ordering insurers to pay claims even if the policy excludes pandemics. Public Adjuster Brian Evans explained, “Ultimately, accurately determining if a policy provides coverage requires careful consideration of the policy terms. Many policies do require timely reporting of losses. For this reason, businesses substantially impacted by the Coronavirus pandemic should prepare and file claims now even in situations where there may be no perceived insurance coverage available.” And according to Tina Willis, an attorney in Florida who has written about COVID’s business impact, “Businesses who are denied coverage under business interruption policies should definitely contact a lawyer in their state to evaluate their actual policy language.”
Some experts are suggesting that pandemic coverage should be structured similarly to the National Flood Insurance pro gram, given that the risk is so vast and the policies would be so expensive if not subsidized.
What’s the bottom line on business interruption coverage for small business owners?
Business insurance can be a valuable type of coverage for your business if it has to shut down due to a covered event and experiences income loss or additional expenses. But it has its limitations and only provides coverage for certain things. Read your policy closely to understand what is and is not covered.
This article is not legal or insurance advice and is intended to be informational only. Biz2Credit and the writer are not liable for the guidance provided. Consult with a licensed attorney or insurance agent for advice specific to your business.