What Small Businesses Must Know About “Business Interruption Insurance”

What happens if your work location gets damaged due to a hurricane or a fire? Your building insurance will cover for the damages, of course, but what about the disruption in business operations and the expenses involved in starting afresh? That’s when the business interruption insurance comes to your rescue. According to a survey by the US Small Business Administration, 90% of small businesses fail to operate and are ultimately shut down within 2 years of suffering massive losses due to a disaster. The same report also reveals that 40% of these businesses fail to rebound, owing to the widespread unawareness regarding the business interruption insurance and its benefits.

Being a small business owner, you should know all about this insurance coverage to help your business survive unfavorable conditions and hazardous situations.

Let’s learn more about this cover and about keeping your business financially secure in the face of disasters. 

What does business interruption insurance cover? 

In the simplest words, this insurance covers the losses a business suffers due to disruptions in operations. These disruptions could be caused by numerous factors like natural and man-made disasters (fires, floods, hurricanes, etc). The coverage recoups your losses for the break. This coverage often isn’t offered separately but becomes a significant part of your property/casualty insurance. It could cover everything from operating expenses, taxes, payment of loans, employee payroll, and the expenses of moving to a temporary location, while repairs are being done in the previous one. 

However, the insurance has its limitations and you should talk to an expert before opting for it. For example, you need to have an additional ‘Prevention of Access’ extension to your BI coverage, if you’re unable to access your office premises for the time. If your business is dependent on utilities like electricity, oil, gas, and water, you may need to add ‘Contingency Business Interruption insurance’ as an extension to your general insurance cover. This apart, you also need to provide evidence of your business doing well before the disaster to back your claim and increase its chances of getting approved. Last but not least, you need to mention the types of business interruption you need the insurance to cover to prevent miscalculations and misinterpretations at the key moment. 

What are the criteria for your BI claims to get approved?

  • The property incurring the damage should be mentioned in the policy – However, if you have the contingency business interruption insurance, you may be able to claim for damage caused to a neighboring property too. 
  • The damage should cause a complete halt of business operations – While some policies may cover for partial suspensions, most of them require absolute suspension of all business operations due to the damage incurred to cover for the loss of income but a key point in business interruption is physical damage so be sure to consult with your insurance professional for details on the limitations of this coverage.
  • The disaster causing the damage must be included in the policy – Many a time, the insurance has separate policies for some disasters, like floods. 
  • The loss of income should be directly linked to property damage – You can’t possibly claim a BI insurance if there’s no direct damage to the business property. 

You also need to understand that the BI will cover only for the loss of income that has been incurred and not something that your business would have generated in the absence of the disaster. Actual values matter and not assumptions, for your claims to get approved without any hassle. And it covers the losses only for the business restoration period, which is defined as the time it takes to repair the damages. This is the area that leads to much confusion, and disputes arise between insurers and policyholders regarding the amount. As most business owners fail to understand how this restoration period clause works, you should talk with your insurer before buying the product to clarify any doubts. 

Are you allowed to calculate the losses and the amount to be claimed?

Yes, you can always take the help of your company’s accountant to calculate the loss of income incurred due to the damage and raise the claim accordingly. Although your insurers will have their adjuster evaluate the claims, taking the help of a lawyer or accountant can help you raise a fair amount and get it approved without disputes. 

What type of evidence do you need?

Three specialized terms are used to describe the evidence needed to approve BI claims, and those are, “verifiable”, “evidentiary”, and “objective”. Your evidence should fulfill all these three definite criteria to be acknowledged and accepted by your insurer. Examples of such evidence include tax statements, customer order receipts, financial statements, annual financial reports, and sometimes, even market forecast reports and other external sources of viable information. 

Now that you know when and how to claim business interruption insurance, it’s best to sit with your insurer and discuss the same right away. No one denies that these are uncertain times, so the sooner you get yourself cover, the better for your small business.