Imagine this scenario: a severe storm passes through your area, inflicting wind damage, storm damage, and loss of property to your office building. This damage leaves your business inaccessible to customers or employees and ultimately forces you to suspend operations. You most likely have standard property insurance to cover the costs of rebuilding and replacing the damaged property- but what about the other losses that arise? You find yourself facing new expenses for temporary offices or relocation while still keeping up with your company’s fixed expenses, such as taxes or rent- all while losing out on potential earnings.
This is where Business Interruption Insurance comes into play. Business Interruption Insurance (also known as business income insurance) is a type of coverage that offers benefits towards losses that result from your business’ inability to operate because of property damage.
What does it cover?
When your business is forced to halt or shut down because of a damaging event, you lose revenue. This is an issue because you still have bills to pay on top of the additional expenses you now have to deal with in terms of repairing the building. Fortunately, if you have business interruption insurance, your business can be reimbursed for a variety of these costs and losses. Generally, business interruption insurance will cover:
- Revenue lost due to the closure
- Fixed expenses (such as rent or payroll)
- Relocation expenses (costs of operating from a temporary location)
How does it work?
The typical process would start with a waiting period; after the damaging event, most policies have a 3-4 day period before business interruption coverage comes into play. Once the coverage is active, your insurer provides coverage based on various factors.
Determining the coverage for your business interruption loss involves establishing what the business would have earned had the loss not occurred. Your insurance company may consider components such as past tax returns and projected sales, so it is necessary that you keep very accurate records.
How do I obtain it?
Business interruption coverage is not sold as a stand-alone policy, but rather is obtained as part of a broader policy. For example, you may have the option of a Business Owner’s Policy that packages property, liability, and business interruption coverage. Or, you could obtain business interruption coverage by adding an endorsement to you Commercial Property Insurance. There are various options, so it is important to discuss things with your insurance agent.
Understanding the Limitations
Every insurance policy has limitations, and business interruption insurance is no exception. In general, business interruption insurance is only available for as long as it is necessary to get the business running again (usually no more than 12 months). In fact, most policies mandate that you resume operations as quickly as possible and take all reasonable steps to prevent future losses.
Of course, it is important to always refer to the specific policy language as requirements, eligibility, pricing, and other factors vary from carrier to carrier and business to business. We recommend discussing these complexities with your insurance agent to make sure you understand the details.
In the Gulf South, we are no stranger to the devastation a natural disaster can cause. If a hurricane, flood, fire, or other damaging event causes your business to suspend operations, it is vital that you have the necessary insurance strategy in place to keep your company afloat.
At Lewis Mohr, we are here to discuss limitations and expectations with you to determine which coverage is most beneficial to you. By understanding your risks and how business interruption insurance could benefit your company, we can help you build an insurance strategy that protects your business and strengthens your business recovery process.