Even a minor closure for your business can mean disaster in your accounting books. Business interruption insurance is a type of insurance policy that covers income that you lose when your business is forced to close due to hazards like natural disasters.
Some disasters covered under this type of business insurance include hurricanes, fires, vandalism and tornadoes. Business interruption insurance is not an individual policy itself but is usually added onto commercial liability insurance. Some companies may refer to business interruption insurance as “business income insurance” because it safeguards your income as a business owner.
Maintaining a business interruption insurance policy can protect your business against unexpected closures. Let’s take a look at what interruption coverage does and doesn't cover, how policies work and how you can decide if this coverage is necessary for your business.
What is Covered by Business Interruption Insurance?
Business interruption insurance typically covers the following expenses and areas:
- Operating expenses
- Loan Payments
- Training and Commission Costs
A business interruption policy will reimburse any profits that would have been made if the business was still open and the interruption had not occurred. The amount that you can claim on your policy is based off your financial records as a business owner.
Even if your business is closed, you’ll still need to make rent and mortgage payments to keep your space. Business interruption coverage will help cover these expenses until your business is up and running again.
A business interruption policy will provide coverage for payroll in order to keep the company from losing any employees.
Businesses are still required to pay taxes even when their operation and opening is interrupted or halted. Whether paid monthly or quarterly, this type of policy will cover taxes in order to avoid missing payment and penalties.
Any loans that were taken out before the shutdown will still be due even if you are not making any profit. Business interruption insurance will help you cover these expenses while your business is closed.
Training and Commission Costs
If you need to purchase new machinery after a disaster, your business interruption insurance will help pay for any training you must fund for employees to do their job safely.
The exact protections that you’ll receive under your business interruption insurance policy will vary depending on the terms of your individual policy and the company you purchase your policy from.
How Does Business Interruption Insurance Work?
Commercial property insurance will cover any physical damage to your business’s commercial space. However, it won’t cover things like lost revenue or training expenses you incur after your business has recovered and reopened.
Business interruption insurance covers salaries, benefits and extra expenses that you incur due to an unexpected shutdown. Business interruption insurance typically works with the period of restoration, which is the period of time between halting of regular business and the starting back up of business.
Policy terms vary and may extend through a specific period of restoration, a maximum period of coverage or a maximum recovery per month. Coverage will depend greatly on your records in order to show how much is needed to cover any loss.
If revenue is not documented with your insurance company, you cannot claim it when you file a claim for lost revenue — so be sure to include all of your income when you apply for an insurance policy.
Restoration Period of Business Interruption Coverage
Your business interruption insurance policy will come with a specific period of restoration, which is the time it takes to repair, replace or rebuild any damage. The period of restoration is the only period of time where the insurer is liable for your business’s lost income. While the restoration must be done with reasonable speed, the coverage will be provided throughout the entire period of restoration, even if the policy expires, so long as the coverage has not been exceeded.
How Much Coverage is Ideal for My Business?
Any type of business insurance policy will have a coverage limit, which is the maximum amount of money that you can claim in the event that you need to file a claim with your insurance provider.
The ideal amount of coverage for your business will vary depending on a range of factors, including your gross earnings, your income, the size of your business, the industry you work with, the number of employees you have and a host of additional factors.
Some of the things you might want to consider when you decide how high you should set your coverage limit can include:
- The amount of time that it would take to reopen your business if you needed to unexpectedly close down
- The current security and safety features installed in your building
- Whether you’d need to completely repair your business before starting back up again or if you could move to a temporary location
- The cost and training required to use your company’s specialized tools
Consulting with a business interruption coverage provider can help you get a better idea of how much coverage you need.
Business Interruption Coverage During Pandemic
Pandemics, viruses and communicable diseases unfortunately fall under the exclusions in most business interruption insurance policies. The lack of coverage is usually because an instance like a pandemic does not cause direct physical loss, which is required to activate most business insurance policies.
According to the last Yelp Economic Average, 60% of businesses that closed due to the coronavirus pandemic are not expected to reopen. The National Association of Insurance Commissioners states that insurers started excluding bacterial and viral infections from policy coverage after the SARS outbreak in 2003.
Policies have very specific language that is used to determine what is covered and what is excluded from coverage. Be sure to fully read and understand any exclusions in coverage so you know exactly when you can file a claim — and when you’re likely to be denied.
Business Interruption Coverage Pricing
The cost of your business interruption policy will vary depending on the industry you’re in, the number of employees you have and the amount of coverage you want your policy to provide for you. The pricing of your policy can also vary depending on your location.
For example, if you are located in an area with a higher risk of wildfires or landslides, the cost of your insurance can increase. If your commercial property has a higher-than-average value, you’re also likely to pay more for coverage.
The best way to learn more about what you specifically can expect to pay for your insurance is to speak with an insurance provider and request a quote.
Prepare to Reduce Your Business Losses
In some cases, your business interruption insurance will require you to make immediate repairs and mitigations after a disaster to avoid additional damage to your property. Your business interruption insurance will also likely require that you keep up with regular maintenance and repair tasks, even if they aren’t required as part of an emergency.
The best way to prepare to reduce losses is by being proactive. You can help prevent any disasters from possibly occurring by checking that all fire alarms and sprinklers within the building are working.
Stay on top of all damage and repairs that are needed to help minimize further damage in the case of a disaster. You can additionally keep a record of all items at your business, including office chairs and desks. This will help you receive a more accurate estimate if you do need to file a claim.
Business Interruption Insurance Exclusions
Even the best business interruption insurance policy won’t cover everything. Some exclusions you’re likely to find in your policy terms include:
- Losses resulting from communicable diseases
- Any items that are broken during the covered disaster
- Flooding or earthquake damage, which often require a separate policy
- Utility expenses
- Any type of undocumented income that you did not submit when you applied for your policy
Best Business Interruption Insurance
Not sure where to start your search for business insurance needs? Consider a few of our favorite policy providers below.
Try Simply Business
Simply Business offers a comprehensive suite of business insurance that specializes in making it easy to insure your business. Whether you’re looking for construction workers' insurance or business interruption insurance for your startup, Simply Business helps you find the right workers’ comp coverage at the right price. This includes any business at any stage of development. Don’t turn to a thousand different carriers when you can get help from Simply Business.
Tell Simply Business a little bit about your business and you'll get almost-instantaneous affordable quotes from top insurance providers to protect your business and safeguard employees. You can also look into business owner’s plans, liability insurance, commercial auto and more that will cover everyone on your team, and you can get covered in accordance with state law without overspending.
Building your business is hard enough. Let Simply Business make it easier. Get a quote from Simply Business today.
Should You Invest in Business Interruption Insurance?
Before you decide if you want to add this type of business coverage, think about what you would do if your business needed to suddenly close. Would you be able to repair your commercial property? Would you be able to keep up with employee wages?
For many business owners, a comprehensive interruption insurance policy can be a lifesaver.
Frequently Asked Questions
What is classed as a business interruption?
A business interruption may vary by policy, but usually includes an unexpected emergency (like a fire or covered natural disaster) that forces your business to close.
Does business insurance cover loss of earnings?
Business interruption insurance will cover loss of documented revenue when your business is forced to close due to a covered peril.