What Is Business Interruption Insurance?
Business interruption insurance (also known as business income insurance) is insurance that covers the loss of income that a business suffers after a disaster. The income loss covered my be due to disaster-related closing of the business or due to the rebuilding process after a disaster.
This insurance differs from property insurance in that a property insurance policy only covers the physical damage to the business, while the additional coverage allotted by the business interruption policy covers the profits that would have been earned. This extra coverage is available to all types of businesses and it is designed to put the business back to the financial position it would be if no loss had occurred.
Business interruption insurance coverage can be added onto the business’ property insurance policy or comprehensive package policy such as a business owner’s policy (BOP). Since this coverage is included as part of the business’s primary policy, it only pays out if the cause of the loss is covered by the overarching policy.
What Is Covered?
A business interruption insurance policy typically covers the following:
- Profits: Any profits that would have been earned (based on prior months’ financial statements).
- Fixed Costs: Any operating expenses and other costs still being incurred by the property (usually based on historical costs).
- Temporary Location: Some business interruption insurance policies cover the extra expenses for moving to and operating from a temporary location.
- Commission and Training Cost: This policy essentially covers the cost of providing training to the operators of the machinery replace by the insurer following the loss.
- Extra Expenses: The reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operation while the property is being repaired.
- Civil Authority Ingress/Egress: A government-mandated closure of business premises that directly causes loss of revenue. An example of this includes a forced business closure because of government-issued curfews or street closures related to a covered event.
Business interruption insurance coverage extends until the end of the business interruption period, which is determined by the insurance policy. Most insurance policies define this period as starting on the date of the covered peril and the damaged property is physically repaired and returned to operations under the same condition that existed prior to the disaster.
Real-Life Example of Business Interruption Insurance At Work
A local bakery has an insurance policy which provides property coverage and business income coverage (which includes extra expense and up to 30 days of extended business income coverage). The bakery has a fire which causes extensive damage to the shop’s interior and cooking equipment. The repairs of the damage will take approximately three months.
The bakery is able to shorten its downtime and resume operations in two months, rather than the expected three months, by arranging to make the goods off-site. However, when it resumes operations, the bakery’s revenue does not immediately return to the level projected prior to the fire.
In this example:
- The policy’s property coverage would protect against the cost of repairing the fire damage.
- Business income coverage would provide protection against certain financial losses (i.e. the profits that would have been earned during the two-moth period the shop is unable to operate and normal continuing operating expenses, such as electrical costs incurred during that time).
- Extra expense coverage would protect against the increased costs the shop incurred to make the goods off site to minimize its downtime.
- Extended business income coverage would protect the bakery against a loss of business income that continues during the 30-day time frame after the bakery has resumed operations and the period of restoration has ended.
Contact R.C. Keller & Company
Business income insurance is an optional coverage and it really only serves to protect you. After all, if you suffer a covered loss and don’t have this coverage, you may be forced to close up shop because you can not afford the bills during the time it takes to rebuild the business.
You should give the trusted advisors at R.C. Keller & Company, a call at 847-907-4520 or email us to discuss your business’ insurance policies, to make sure you are properly covered. We are your local insurance agents that have been protecting the businesses of Schaumburg and the surrounding suburbs since 1910.