Business interruption coverage, also called business income insurance, is designed to protect a company’s financial stability when unexpected events force a closure or reduction in operations. While many business owners assume this coverage will protect them during any disruption, the reality is more nuanced. Understanding what business interruption insurance actually covers – and what it doesn’t – is important for accurate risk management and financial planning.
What Is Business Interruption Coverage?
Business interruption insurance compensates companies for lost income and helps cover ongoing expenses during a temporary shutdown caused by a covered peril. In most cases, this coverage is bundled with a commercial property insurance policy or a business owner’s policy (BOP) rather than being purchased as a standalone product.
The key principle behind business interruption coverage is simple: If a covered disaster damages your business property and forces you to shut down or reduce operations, the insurance replaces the income you would have earned during that time. For example, if a fire damages your store and you must close for repairs for two months, business interruption insurance helps cover the lost income you would have earned during that period.
For some policies, a full cessation of business operations is necessary to trigger coverage; other policies also provide coverage for partial closure.
Physical Property Damage from a Covered Peril
Many business owners do not realize that business interruption coverage is only triggered by direct physical damage to insured property, and that the damage must have resulted from a peril covered under their commercial property insurance or BOP policy. Typically, covered perils include fire, lightning, theft or vandalism, and certain storm-related damage. Some policies provide civil authority coverage, which applies when government authorities restrict access to a business due to nearby property damage, such as when a fire in a neighboring building causes the authorities to restrict access to your building. However, civil authority coverage only applies when the government order is directly related to physical damage nearby.
Common Exclusions
Standard commercial property and BOP policies typically have several exclusions, which apply to business interruption coverage. Usually, damage from floods and earthquakes is not covered, necessitating separate policies. Losses caused by utility failures or internet disruptions that originated off-premises – such as a power grid failure or widespread internet outage – are usually excluded as well. Many policies also explicitly exclude losses caused by viruses and bacteria, including government shutdowns due to public health reasons.
What Business Interruption Coverage Includes
Every policy is different, but generally speaking, business interruption insurance covers lost business income, typically calculated using historical financial data. The policy will also typically help pay for fixed operating expenses, including rent or mortgage payments, utilities, insurance premiums, payroll and taxes, up to the policy limits. If the business relocates temporarily while repairs are underway, the policy may cover reasonable relocation expenses. Other extra expenses, such as renting replacement equipment, may be covered if they help the business offset income losses.
How Long Does Coverage Last?
Business interruption coverage applies during the “period of restoration,” which refers to the time needed to repair or replace damaged property and resume normal operations. Many policies include a waiting period of 48 to 72 hours before coverage kicks in. Also, many businesses are unpleasantly surprised to learn that the period of restoration, and therefore coverage, applies to how long it should reasonably take to reopen the business – and not necessarily the amount of time it actually takes.
While business interruption insurance can be a valuable financial safety net, it is important for business owners to understand its coverages and limitations.
If your business insurance company is challenging your business interruption claim, contact Schwartz, Conroy and Hack, PC for assistance. We have the expertise and tenacity to make insurance companies keep the promises they make to you and your business.
