What Is Business Interruption Coverage?

Dan had just opened up a shop of his own. He had taken a loan from the bank to open up the shop of his dreams. But none could have predicted that the next few months spelled disaster. It came in the form of one of the most devastating snowstorms to hit Texas in recent years. The weather was so cold that he was sure the pipes had frozen. Dan was wondering whether they would burst. The roof collapsing worried him, too. It was snowing so hard. Would his dream shop devolve into a cracked and frozen wreck? Would the whole area be cordoned off to avoid accidents? Worst of all, expecting customers in weather like this was outlandish. How would he pay his staff? Or his taxes? Dan could feel a lump forming in his throat as he started calculating the costs of all these setbacks. It was going to be a cold winter, indeed.

But it didn’t have to be if Dan had just gotten business interruption coverage. What is that, you ask? Business interruption insurance is coverage that replaces the income lost by a business during a disaster. Such as a snowstorm. Or a fire, or a natural disaster. It’s not usually sold as a separate policy but is added to a property/casualty policy. It can also be included in the comprehensive package policy as an add-on. As a business owner, you must be wondering what all it covers and who this would benefit. Let’s explore this a bit more.

What Is Business Interruption Insurance?

Investopedia says that the standard business interruption policy only applies when the business sustains direct physical loss or damage, such as in a fire. This is called the ‘actual loss sustained’. The insurer is obligated to pay if the insured business sustains an interruption of operations, leading to a business income loss. This loss, however, is subject to the variable policy limit, depending on the location. Business interruption can also apply when a nearby business sustains direct physical loss or damage and a civil authority like the government closes all businesses as a result.

Business interruption insurance premiums (or at least the additional cost of the rider) are tax-deductible as ordinary business expenses. It pays out only if the business income loss is covered by the underlying policy. The payable amount is based on the business’s past financial records. This coverage lasts until the end of the business interruption period. That will be determined by the insurance policy.

The Insurance Information Institute states that the standard policy is 30 days. It can be extended to 360 days in some conditions. Most of these policies define this period from the date that the peril began. That extends to the date the damaged property is physically repaired. There can be a waiting period of 48 – 72 hours.

What Does Business Interruption Insurance Cover?

Most of these policies cover the following:

  • Fixed Costs – Operating expenses, and other incurred costs of conducting business can be included.
  • Profits – The insurers will assess the business’ performance over the past few months before the disaster. It will then reimburse the profits that they would have earned if the event had not occurred.
  • Extra Expenses – Business interruption insurance reimburses for reasonable expenses beyond the fixed costs. That helps a business owner like Dan continue operating while his business gets back on solid ground.
  • Temporary Location – Policies may sometimes cover the expenses of moving and operating from a temporary location. That’s useful when there has been extensive and debilitating damage done to physical property.
  • Employee Wages – This is extremely important, as it helps businesses cover their payroll despite the losses created by the disaster.
  • Taxes – It covers taxes related to the business, which helps in avoiding penalties.
  • Loan Payments – Business Interruption insurance coverage can help a business make loan payments even when they aren’t generating income.
  • Civil Authority Ingress/Egress – What if there’s a government-issued curfew or street closures due to a perilous event? That can result in a government-mandated closure of business premises. This would directly cause financial loss. Examples include forced closures because of government-issued curfews, or street closures related to a covered event.
  • Commission and Training Cost – A company will often need to replace machinery in case of a covered perilous event. That will require retraining personnel on how to use the new machines. These costs may be covered by a Business Interruption insurance policy.

What Doesn’t Business Interruption Insurance Cover?

According to the Insurance Information Institute, one may not be covered for the following:

  • Pandemics, viruses, or communicable diseases (including COVID-19)
  • Utilities
  • Broken glass or other items resulting from a covered event or loss.
  • Undocumented income that’s unlisted on your business’s financial records
  • Flood or earthquake damage. These are covered by a separate policy.

Key Take-Aways

  • This insurance covers the cost of replacing incoming that is lost due to the halting of business operations. This must be a result of direct physical loss or damage.
  • It covers operating expenses, moving to a temporary location (if necessary, payroll requirements, taxes, and loan payments.)
  • The payable limit of a business interruption insurance policy depends on the nature of the event and the location of the business.
  • Sometimes, this insurance can apply if a civil authority shuts down a business. That could be due to physical damage to nearby businesses.
  • Standard business interruption insurance policies do not apply to pandemics.

In Dan’s case, the business interruption insurance policy would’ve given him security if the winter storms made his roof fell in, or he suffered wall/floor/ceiling damage due to burst pipes. It would have helped him keep up his loan payments and ensured he paid his taxes on time. A business interruption insurance policy would’ve safeguarded his employees as well. Even if his property didn’t break down that cold season, this policy would’ve given him mental peace knowing that in the worst-case scenario – he was protected. Don’t be like Dan –insure yourself!