What is Business Interruption Insurance?

Business interruption insurance, sometimes called business income insurance, is a type of insurance coverage that can be added to existing property policies or a packaged policy like a business owner’s policy (BOP).  This policy covers the loss of income that a business might suffer after experiencing a catastrophic event like a fire or natural disaster.

Unlike property insurance which only provides protection for damage to physical items and property, the additional coverage allotted by a business interruption policy covers the profits that would have been earned had the event not taken place. This extra policy provision can help every type of business and is designed to help a company remain in the same financial position it would have been in before the loss.

An example of when this type of policy would go into effect is if a company near your business location caught fire and the fire spread to your office or storefront destroying your property or inventory in the process. In this circumstance, it’s very clear that your company will not be back on its feet for a while. You likely also suffered significant merchandise loss during the fire leaving you wondering how you will generate income while you wait for new merchandise. If you have business interruption insurance, the policy would reimburse your company for any resulting profit loss as a direct result of the fire.

The following additional scenarios are also often covered by a business interruption insurance policy:

• Fixed Operational Costs
  Operating expenses and other costs that would continue to be incurred by the business. Examples include rent payments or utility bills.
• Temporary Relocation Expenses
  Some policies cover the extra expense of moving to a temporary place to operate while your existing space is rebuilt or repaired.
• Civil Authority Ingress/Egress
  Government-mandated closure of any business premises that directly cause a loss of revenue. An example of this would be forced business closures because of government-issued curfews or street closures related to a covered event.
• Unforeseen Expenses
  Reimbursement for expenses that are incurred outside of any fixed costs that allow the business to continue to operate while the location is repaired.

You may be wondering how much coverage you need for your business.  Every business has different needs, and there is no universal answer. Some items to examine when considering business interruption insurance:

• How likely is it that a covered event will occur? Think about hurricane season if you operate in a coastal area. How long would it take you to get up and running after a serious event?
• If you rent your commercial space, do you know how well protected your building is? Is there a fire sprinkler system and is it up to date and functional?
• In your area, is new commercial space readily available? Do you operate in a region that is disaster prone? Think about areas that have frequent tornados; you would have to compete with other displaced businesses looking for new space which will take more time and possibly add to your losses in the process.

Finally, it is also important to consider the amount of time you expect it will take to rebuild your business after a loss. This “restoration period” as it is known on the policy, determines how much profit you might lose and can vary depending on the severity of the loss your business experiences. For example, a small water leak might only result in a 3-day restoration period, while a large regional event like an earthquake could take months to rebuild from.

At Layr, we help design business interruption insurance policies that are uniquely tailored to the specific needs of the company purchasing the protection. And, if you have an existing BOP or GL policy with us, adding this extra layer of coverage might be less expensive than you think.