Business interruption insurance helps replace lost income and pay for extra expenses when a business is affected by a covered peril. Business interruption coverage (sometimes called business income coverage) is typically part of a business owners insurance policy. Read on to learn how business interruption coverage can help your business recover after a loss.
What Does Business Interruption Insurance Cover?
Business interruption insurance helps protect against lost income after a covered peril affects a business. Covered perils typically include theft, fire, wind, falling objects or lightning. Be sure to read your business insurance policy documents so you know which perils your insurer helps cover.
Say a fire damages your business, for example, leaving the building uninhabitable and destroying merchandise just before it was about to ship to customers. Business interruption coverage may help reimburse you in two ways:
- For lost income from the destroyed merchandise (minus expenses you may have already paid, such as shipping).Your pre-loss earnings are the basis for reimbursement under business interruption coverage. Lost earnings, also known as the actual loss sustained, are typically defined as revenues minus ongoing expenses.
- For extra expenses if you must temporarily relocate your business because of the fire (for example, the cost of rent at the temporary location).
Keep in mind that, in the scenario above, the property coverage in your business owners policy would help pay to repair the damaged building (if you own it). Business interruption coverage would not pay for these types of repairs.
How Much Coverage Do I Need?
Business interruption insurance typically has a coverage limit. A limit is the maximum amount your insurer will pay toward a covered claim. Financial losses that exceed your coverage limit are typically your responsibility. That’s why it’s important to choose coverage limits that are appropriate for your business.
Here are a few things you may want to consider as you’re choosing the amount of business interruption coverage for your business:
- About how long would it take to get your business back up and running after a loss?
- If you rent your office space, how well protected is the building?
- Are the fire alarms and sprinkler systems in the building up-to-date and functional?
- Is comparable commercial space readily available in your area, or would it take weeks to find a suitable temporary location?
Business Interruption and Restoration Period
Your business interruption coverage likely has a “restoration period.” This is the length of time that your policy will help pay for lost income and extra expenses while you restore your business after a covered claim. It’s important to read your policy documents to understand when your restoration period starts and how long it lasts.
Typically, there’s a 48- to 72-hour waiting period before the period of restoration kicks in, but it typically lasts up to 12 months (this time period usually can’t be extended by the policy holder). That means if your business was damaged on October 1, you’d receive business interruption coverage benefits until October 1 of the following year — even if your policy expires before then. For example, your policy might end because your business was heavily damaged and you may not have a business to insure. If your business’s building repairs are not completed before the 12-month restoration period ends, your business interruption coverage would expire. This means you’d stop receiving reimbursement for things like lost income.
Keep in mind that you’ll also need to make repairs to your business within a reasonable amount of time to help ensure reimbursement from your insurer. If you don’t, it could create potential issues with loss of income payments.
Reducing Business Losses After An Interruption
When a business is damaged in certain situations, a business owner may need to make immediate repairs to help minimize further damage. Let’s say a strong storm rolls through and high winds caused a few windows to break. An insurance company will typically expect a business owner to board up the broken windows to help keep the premises secure and help prevent further damage.
Keep in mind that many insurers will usually reimburse business owners for some of the repairs they may need to make right away. That means it’s a good idea to document any damage with photos or video and keep repair receipts.
Understanding how business interruption coverage helps protect your business can help you be more prepared if you ever need to file a claim. Have questions, or want to make sure your business insurance policy is keeping up with your needs? Contact a local agent today.