How Does Business Interruption Insurance Work?
You might think that your business is covered in every loss scenario imaginable, but have you ever thought about what happens after a loss? You can’t run a business without a network or a building, but shutting down your business completely could cost thousands of dollars in lost income. To cover your finances after a loss, you need business interruption insurance. Learn how business interruption insurance works and what it covers.
Business Interruption Insurance Explained
Business interruption insurance is vital for most companies because it pays for lost income resulting from a loss event. For example, if your office building becomes uninhabitable after a fire, you might have to shut down operations or move elsewhere for a few weeks. During that time, you would lose income from the interruption and pay extra expenses for a temporary location, new equipment, and more. Business interruption insurance can help you cover those unanticipated costs.
Your business interruption insurance coverage only kicks in if the lost income results from a covered peril. If you have to shut your business down because of a natural disaster, the business interruption coverage in your policy will likely cover the costs of a shutdown. However, if your policy only covers fire-, storm-, and flood-related losses and you sustain property damage after an earthquake, your business interruption coverage won’t help.
Business interruption coverage only lasts for the length of time specified in your policy. Some policies only offer coverage for 30 days, whereas others pay for losses until you restore your damaged property to its previous condition. Check your policy or consult with your agent if you’re unsure how your business interruption insurance works.
What Is Covered by Business Interruption Insurance?
Every policy is different, but most business interruption insurance policies cover the following expenses:
Revenue: Your insurance company typically uses records from previous months to determine how much you would have made if the loss hadn’t occurred.
Mortgage or lease payments: You still have to pay for your property even if it’s unusable, which is why your policy often covers rent and mortgage payments while your business recovers.
Payroll: If you don’t pay your employees’ wages during a shutdown, you may lose some of your best workers. Your policy will help you cover payroll after a loss event to prevent employees from leaving.
Taxes: You’re required to pay taxes even after disaster strikes. Your policy helps you avoid penalties by covering monthly or quarterly tax payments during recovery.
Loan payments: If you can’t pay your loans after a loss event, your business interruption coverage will help.
Training costs: You might have to purchase new equipment and teach your employees how to operate that equipment after a loss. Your policy might cover these training expenses.
Civil authority: If your loss was due to civil unrest, you might have to shut down your business in the aftermath. Many policies cover expenses related to these civil authority orders.
Most business interruption policies don’t cover lost operating expenses that result from a communicable disease. Your business interruption insurance also usually has a coverage limit. Once your policy pays out that limit amount, you will no longer receive coverage.
Do you want to learn more about the insurance coverages your small business needs? Read our how-to guide on choosing business insurance.
Can You Get a Standalone Business Interruption Insurance Policy?
Business interruption insurance works differently than other coverages. In most cases, you can’t purchase a standalone business interruption policy because this coverage is secondary. You need to experience a covered loss event before business interruption coverage kicks in. As a result, you can add this coverage to an existing package policy, commercial property policy, or cyber liability insurance policy.
Are you unsure if your policy covers business interruption? Talk to your insurance agent to see what your options are.
Learn More About How Business Interruption Insurance Works
If this article is the first you’ve heard about business interruption coverage, you may be wondering if your business is vulnerable. The good news: if you have a package policy, business owner’s policy, or standalone property policy, there’s a high chance you already have some business interruption coverage.
Do you want to learn more about how business interruption insurance works or assess your current policies? Get in touch with the insurance experts at Southpoint. We can evaluate your risks and help you determine how much business interruption coverage your company needs. We work with the most renowned carriers to find affordable and comprehensive insurance quotes for our clients.
Contact us today to see where your coverage stands.