Business interruption (or business income) insurance may be included in a commercial property or business owners policy. The coverage may require a modest additional premium, but the peace of mind it affords makes it well worth the cost. Learn why business interruption insurance is important, how much it costs, and what some alternatives are.
What Is Business Interruption Insurance?
Business interruption insurance covers income that a business loses and the operating expenses it incurs after it’s forced to shut down due to a fire, windstorm, or another insured peril.
Alternate name: Business income insurance
Many commercial property policies exclude certain losses. These include income losses resulting from broken items (like glass) due to a covered item or loss, flood or earthquake damage (which are covered by a separate policy), or contamination by bacteria, viruses, and similar perils, like a pandemic.
Why It’s Important
Suppose you operate a busy coffeehouse in a building you own in a popular tourist area. Your building and its contents are insured under a commercial property policy that doesn’t include business interruption insurance. Late one night, a windstorm roars through town and destroys half of your building. Repairs take six months, and you’re unable to operate your business or generate any income until they’re completed. Your commercial property insurance will cover the cost of repairing or replacing your wind-damaged property. However, it won’t cover the income you lose or the overhead expenses you must continue to pay during the six-month shutdown. Business interruption insurance covers income losses and expenses that continue during the “period of restoration,” which begins when covered damage forces a business to suspend its operations and ends when the damage is repaired. Continuing expenses are the costs you’re obligated to pay even though your business isn’t operating. Examples include rent or mortgage payments, taxes, utilities, and (in some cases) payroll.
Time Frame for Coverage
Many business interruption forms include a waiting period—a type of deductible provision—that can delay the period of restoration from starting. The waiting period is typically 48 to 72 hours, but those hours can be reduced or eliminated for an additional premium. When a waiting period applies, the period of restoration will begin when the waiting period ends. For instance, if the waiting period is 72 hours, no coverage will apply to income lost or expenses incurred during the first three days of a shutdown.
How Much Does Business Interruption Insurance Cost?
Small business owners pay an average annual premium of $500 to $3,000 for business interruption insurance. The cost of business interruption insurance can vary depending on the following factors:
Type of business: Your industry affects your risk of physical losses that can generate losses. For instance, a welding shop has a greater risk of fire than an accounting office, so a welder will likely pay more for business interruption insurance than an accountant. Location: Your geographic location affects your exposure to perils like windstorms and wildfires, which can cause property damage that forces your business to shut down. Your revenue: Because your premium is based on your projected revenue, your premium will rise as your expected revenue increases. Scope of coverage: Your business interruption insurance can be broadened via endorsements. For example, the utility services endorsement covers income losses that result from power outages and other utility service interruptions. Generally, the broader your coverage, the higher your premium. Your insurer: The cost varies from one insurer to another.
How Much Coverage Do You Need?
Once you’ve decided to buy business interruption insurance, you’ll need to determine how much coverage you need. The calculations are relatively easy if you use a business income insurance worksheet. If you don’t have a worksheet, you can ask your insurer to provide you with one. One thing you should consider when calculating your business interruption limit is the amount of time you’ll need to make repairs or to reconstruct the damaged property. Many business interruption forms limit the period of restoration to 12 months. If you expect repairs to take more time, you can ask your insurer for a longer restoration period. For an additional premium, some insurers will extend the restoration period to 18 or 24 months.
Other Coverages To Consider
Here are some additional coverages to consider when buying business interruption insurance:
Extra expense insurance: Often written in conjunction with business interruption insurance, this kind covers expenses you incur (beyond your normal expenses) to get your business up and running as quickly as possible after a physical loss.Utility services interruption insurance: This type of insurance covers income you lose due to a shutdown of your business caused by the interruption of a utility service.Contingent business interruption insurance: This kind covers income you lose when a major supplier, manufacturer, or customer suffers a disruption and isn’t able to provide raw materials or supplies or purchase your products.
