Business Interruption Insurance - What's Covered?
Business interruption insurance is the most important property insurance a small business can buy.
Did you know 40 to 60% of small businesses never reopen their doors following a disaster? Or that 90% of smaller companies fail within a year unless they can resume operations within five days of a disaster?
Why do you think that is? Is it due to a lack of motivation or desire? Or is it a lack of incoming money to keep the business afloat?
By definition, business interruption insurance pays your business net-income and operating expenses during the period you're not generating income (or partial income).
In addition to covering your net-income and normal operating expenses, business interruption insurance can also cover all the extra costs, such as leasing out a new business location, hiring movers, expediting shipping, etc.
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The 2 Types Of Business Interruption Coverage
In the event of a business interruption event, you will utilize two important coverages: business income and extra expense. Each coverage plays a critical role in opening your doors and keeping your business solvent during these hard (and expensive) times.
Business Income Coverage
If your business were to become nonoperational due to a property loss, there are often more casualities than meet the eye. In addition to the visible property damage that occurred, there is the loss of cash that you won't generate due to your property being nonoperational. Oftentimes, this is MUCH larger than the amount of property damage—especially if that property is hard or takes time to replace.
This problem is often referred to as "time element" and is one of the greatest threats businesses face. Imagine not generating any revenue, but your bills are due and you need to keep critical employees on staff...possibly for years.
For most businesses, this would be devastating.
Business income insurance pays for time element losses. It covers your net-income and normal operating expenses when your business is down and rebuilding.
Extra Expense Coverage
Now that you have a plan to pay the bills and generate income while the business is nonoperational, extra expense coverage will help you expedite and pay for the additional costs associated with opening up your operations elsewhere.
One of the most common extra expense claims is the cost of moving to a new location. Since this isn't a "normal operating expense," it would not be covered under business income insurance. Extra expense coverage would ensure that all the costs associated with moving locations are paid for. This will help you open your doors as soon as possible and minimize your losses during the period of restoration.
What is the period of restoration?
Business interruption insurance pays to keep your business afloat during the "period of restoration." But what exactly does that mean?
The period of restoration is the span time between when the covered property claim happened until the doors of your business are reopened and you're generating income. Another way to think of it is the time from when you submit a business interruption claim letter to when you process your first post-disaster receipt.
Frequently, business interruption insurance limits the period of restoration to 12 months. It is critical that you do a business continuity plan to discover how long restoration might take in the event of a disaster. If you own a larger building, you could need coverage that lasts up to three years and that would require business interruption extensions.
In addition to covering the standard property (buildings and contents), you can also purchase business interruption insurance on equipment essential to your operations. For instance, if a contractor has a specialized piece of equipment, the contractor can purchase inland marine business income coverage. This will pay the net-income that the equipment would have generated while waiting to be replaced.
How much does business interruption insurance cost?
If you have a large or financially complex business, it is impossible to ballpark the coverage costs and you'll likely need a custom quote. For small and medium-sized companies, coverage can range from $100 to $2000 annually.
Based on what we usually see, the coverage cost accounts for an insignificant fraction of your yearly premium, BUT it can be the difference between your business opening its doors in the future or not.
Business interruption insurance for contractors, retailers, or any other type of business is one of the best values for your premium dollar coverages that you can purchase. It will keep you afloat during periods when your costs are at an all-time high and you have no (or a significantly reduced) income. This coverage will also secure your payroll to keep your staff employed during the downtime.
About The Author: Austin Landes, CIC
Austin is an experienced Commercial Risk Advisor specializing in property & casualty risk management for religious institutions, real estate, construction, and manufacturing.
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