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Business interruption insurance
Business interruption insurance
If a business is forced to temporarily close due to a catastrophic event such as a fire, business interruption insurance can pay for lost revenue, day-to-day expenses, and rent or relocation costs.
What is business interruption insurance, and why is it important?
Business interruption insurance covers a loss of business income when your small business is forced to close temporarily, due to a fire or other covered property claim. It can help cover day-to-day operating expenses, lost revenue, and relocation.
Fires, natural disasters, burst pipes, and similar incidents can bankrupt your small business with costly renovations at a time when you're taking in zero profits. Business interruption insurance keeps your business afloat until you can reopen.
You may also see this type of insurance referred to as business income insurance. You can buy this business interruption coverage as an add-on to your commercial property insurance or a business owner’s policy (BOP). Income coverage cannot be purchased as a separate policy.
Business interruption insurance is essential if your business:
- Operates out of a fixed location, such as a storefront or office
- Depends on specific equipment or machinery
- Stores essential inventory or supplies
- Has high daily operating costs
- Owes loans, leases, or mortgage payments
What does business interruption insurance cover?
Business interruption insurance compensates your business for its normal operating expenses and other costs if a fire or other commercial property insurance claim forces you to close your doors temporarily.
Specifically, it can help pay for:
Lost income
If your business can’t serve customers, sell products, or work with clients because of physical property damage, business interruption insurance will help compensate your business for the loss of income. Your financial records determine how much money you're eligible to receive.
Rent or lease payments
When a covered event forces your business to close temporarily, you might still have to pay rent or make payments on equipment that you don’t own. Business interruption insurance covers the cost of rental, lease, and mortgage payments while your business isn’t making money.
Relocation costs
If your business is forced to relocate due to a covered peril, business interruption insurance coverage can help pay for your moving costs. It can also pay for rent in the temporary location.
Employee wages
To retain employees while your business is closed, you’ll have to keep paying them. Business interruption insurance covers the cost of payroll while your business isn’t making revenue. Most business interruption policies cover the cost of up to one year of pay for each employee.
Taxes
Even if finances are tight during a temporary shutdown, you’ll still have to meet your quarterly or annual tax obligations. Business interruption insurance ensures that you have the funds to pay the taxes you owe, even if your business is no longer bringing in revenue.
Loan payments
If your business has loans, you’ll still need to meet your loan obligations when your business isn’t making revenue. Business interruption insurance can help you with payments for a community development loan for a nonprofit, a Small Business Administration (SBA) loan, and other loans while your business recovers.
How much does business interruption insurance cost?
Business interruption coverage costs vary tremendously, based on the scope of your business and liabilities.
Several factors affect the cost of business interruption insurance, including:
- Business revenue
- Location
- Coverage limits and deductible
- Property value
- Industry risks
- History of insurance claims
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Who needs business interruption coverage?
If damage to your building, equipment, or inventory could force your business to close, then business interruption insurance is essential. Any business that operates out of a physical location, depends on tools or machinery to do its work, or sells or manufactures products should carry this coverage.
Industries that rely on business interruption insurance include:
Food and beverage businesses
A grease fire at a fast food restaurant destroys the kitchen and part of the seating area. A contractor tells the owner that renovation could take up to a year. While commercial property insurance covers the repairs, the owner can’t make money while the business is under construction. Business interruption insurance helps recoup the lost revenue and pay the employees' wages while the work is done.
Retailers
A roof leaks during a rainstorm at an electronics store, causing a mold problem and making it impossible to serve customers. While the business is closed for renovations, it still needs to make rental payments on the store. Business interruption insurance covers these costs and provides business income coverage until the shop reopens.
Construction businesses and contractors
A fire destroys a contractor's trailer, forcing him to withdraw from bids and miss his revenue goals. At the end of the quarter, the business still needs to pay estimated taxes on the revenue it made before the fire. A business interruption insurance policy covers these costs so the contractor can use their money to get the business up and running again.
Manufacturers
A pipe bursts at a beverage manufacturing plant, flooding the office and factory floor and destroying walls, carpeting, furnishings, and equipment. The factory is forced to close for three months for renovation. Business interruption insurance helps the factory meet its payroll obligations and covers other expenses during the period of restoration.
Professional services
An intruder breaks into a law firm, vandalizing the office and breaking several windows. The law firm is forced to relocate to a new office space until the windows and locks are replaced. Business interruption insurance pays for moving costs and rent at the new location.
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What does business interruption insurance not cover?
Business interruption insurance covers relevant financial losses when a property claim forces your business to close, but it won't cover every situation. For instance, your policy does not provide coverage for:
Property damage
Business interruption insurance covers the financial – not material – costs of a shutdown. The cost of repairing or replacing damaged business property is covered by commercial property insurance, which is included in a business owner's policy (BOP).
Interruptions unrelated to property damage
Business interruptions that aren't related to a property claim likely won't be covered by business interruption insurance. However, it's possible to buy coverage for other types of events, or add endorsements for specific risks.
For example, cyber insurance covers costs when you are forced to suspend business operations due to a cyberattack or data breach.
Short or partial interruptions
To qualify for a claim on your business interruption insurance, the forced closure must last for a certain length of time, usually 72 hours. That means you won't be able to collect on a short-term event like a power outage. Also, your business must close completely to qualify for a claim – not just scale back operations.
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Other important policies for small businesses that purchase business interruption insurance
While business interruption coverage can be an important part of your risk management plan, there are other small business insurance policies that can also help you protect your business:
General liability insurance: Covers common business risks like customer injury, customer property damage, and advertising injury. It protects your small business from the high costs of lawsuits and helps you qualify for leases and contracts.
Business owner's policy: A BOP bundles general liability coverage and commercial property insurance at a discount. It protects against the most common lawsuits and property damage. You’ll need either commercial property insurance or a BOP, in order to buy business interruption coverage.
Workers’ compensation insurance: Workers’ comp covers medical costs for work-related injuries and illnesses. Most states require this coverage for businesses with one or more employees.
Commercial auto insurance: This policy is required in most states for businesses that own vehicles. It covers your legal bills, medical expenses, and property damage if a business vehicle is involved in an accident.
Cyber insurance: This policy, also called cyber liability insurance and cybersecurity insurance, protects small businesses from the high costs of a data breach or malicious software attack. It covers expenses such as customer notification, credit monitoring, legal fees, and fines. Many cyber insurance policies also include business interruption coverage, for lost income that happens after a cyberattack.
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FAQs about business interruption insurance
Review answers for frequently asked questions about business interruption insurance.
Is civil authority coverage included in business interruption insurance?
Business interruption coverage may include a civil authority clause that covers government-ordered business closures. Invoking this clause involves the following criteria:
- The denial of access involves a physical damage incident to a nearby property.
- The damage must be from a risk that’s covered by your own business interruption policy.
- There will be a waiting period of 24 to 72 hours before your coverage starts.
- The amount of coverage is limited, usually to 15 to 30 days.
Who is eligible for business interruption insurance?
To qualify for business interruption insurance, most insurance providers require that your business have a commercial location. If you operate your business out of your home, you likely won’t be able to add business interruption insurance to your business owner’s policy.
Other factors can also affect your business’s eligibility for business interruption insurance, including:
- Business classification or industry
- Previous business interruption claims
- Your location
How does business interruption insurance work?
Business interruption insurance covers the cost of a temporary shutdown when:
- Your business has commercial property insurance through a standalone policy, or has it bundled in a business owner's policy or commercial package policy. (Check that your policy includes a business interruption rider.)
- The cause of the interruption is a covered loss under your property insurance policy. Property insurance, sometimes referred to as business hazard insurance, usually covers fires, storms, vandalism, and other direct physical losses.
- Your business shuts down completely. If you’re still operating and bringing in revenue in any capacity (even online or out of your home), you won’t be able to collect business interruption benefits.
Your business must be closed for a certain period of time – usually 72 hours, but it varies by policy – before you can begin collecting benefits. Each insurer may include different business interruption coverages and exclusions to distinguish itself from the competition.
How long does business interruption insurance last?
Most policies will cover any interruptions that last up to 12 months, but the length of time that your coverage applies may vary by insurer. Your business must have been closed for the amount of time specified by your policy (usually around 3 days) before your coverage period can begin.
Can I add endorsements to business interruption insurance?
Yes, you can add endorsements to your business interruption policy, such as:
Extra expense coverage pays for expenses above and beyond a business’s normal operating costs. This type of coverage funds "extras" – i.e., non-ordinary operating costs like leasing equipment, paying employees overtime, or hiring temporary workers – that can help keep your business open after a disruptive event.
Contingent business interruption insurance provides financial assistance when the loss of a primary supplier, partner, or customer affects your ability to do business. It pays for ongoing expenses while you search for a replacement. This rider makes sense if your business relies on:
- A single supplier or manufacturer to provide certain materials
- A few major customers to provide most of your revenue
- Other nearby businesses to attract customers
With Insureon, you can chat with a licensed insurance agent to make sure your policy includes everything you need. They can also help explain any confusing policy language.
Does business interruption insurance covers losses related to COVID-19?
In most cases, this policy will not cover losses related to the coronavirus pandemic. Business interruption insurance activates alongside a commercial property insurance claim, such as a fire, burst pipe, or other incident that causes physical damage to the building covered by your policy.
Insurance companies do not include protection against communicable diseases as standard coverage. For that coverage, you would have to purchase a communicable disease rider, and likely also prove the disease was present on your property. If you think your business might qualify for a claim, contact your insurance provider.
What's your business continuity plan?
Most companies can't survive a long interruption after a disaster strikes, but a business continuity plan can prop up your business until you're back in action.
Updated: January 11, 2024