Business Interruption Insurance (also known as ‘business continuity insurance’ or ‘business disruption insurance’) is a type of commercial property insurance that covers you for loss of income during periods when you cannot carry out business. Your business’s ability to operate and generate revenue may face unexpected challenges. With business interruption coverage, you may be able to collect the income you would have expected to generate were it not for the unforeseen event that caused you to lose it. Let’s look closely at BI and how it can help keep your business solvent during this time.
What is this type of insurance?
Business Interruption Insurance is designed to help you recover lost income and ongoing expenses while your business is temporarily closed. Most insurance providers offer a form of BI insurance that covers your revenue until your business returns to normal levels, matching revenue levels before whatever unforeseen event caused the sudden loss in the first place. However, sometimes business owners forget to protect themselves against the unexpected.
“Our research suggests that one in five small businesses would shut down within 30 days if sales stopped, yet only 23% have Business Interruption insurance. This means any hiccup in cash flow can put the business at risk. In general, business owners aren’t properly insuring themselves against risks to revenue,” says Brad Plothow, Vice President of Brand & Communications, at Womply.
How can Business Interruption insurance protect you?
This type of insurance coverage can help you prepare for the unexpected. It can help your business:
- Prevent the loss of income if your business cannot operate
- Protect yourself from financial obligations that do not stop, even though your business is closed due to a loss, including bills and lease payments
- Extra expense coverage is available to pay for additional costs over normal operating expenses, such as relocation expenses
BI insurance usually cannot be purchased as a standalone policy. Most insurers will include it under your commercial property insurance or offer it as an add-on to your base policy.
Who should have Business Interruption Insurance?
As you may never know when an unanticipated event may happen, businesses should consider getting this type of insurance. Without it, you will lose revenue every day you are not operating, and it could take weeks or months to repair and restore your property. Losing revenue daily when your business is closed will hinder your ability to pay bills, salaries, and all other expenses.
Any organization can benefit from BI, especially new companies, start-ups, and small to medium-sized businesses (SMBs). However, new companies and start-ups are less prepared and not financially stable enough to withstand a disaster, causing a sudden closure. They are more likely to close after a loss if they do not have Business Interruption insurance.
This includes the following types of businesses:
- Retail shops
- Restaurants
- Salons
- Manufacturers
- Offices
Types of Business Interruption Insurance
Business Interruption insurance has flexible solutions. According to the IBC, here is a breakdown of the types of coverages available:
- Named perils: This covers losses named as part of business interruption.
- All risk: This covers any threats that are not explicitly excluded and is also referred to as actual loss of income. It pays up to the actual loss amount.
- Limited indemnity: This provides you with resources until you resume operations.
- Extended indemnity: This provides assistance until your business returns to its normal (pre-disaster) level of operations.
- Contingent business interruption: You cannot operate because of a disaster to your suppliers or customers, preventing you from generating sales.
- Additional expense: Get resources for extra expenses such as outsourcing work, temporary rentals, and locations.
What is covered by Business Interruption Insurance?
Business interruption insurance policies give you coverage when you’re unable to run your business as usual because of damage claims, such as theft, fire, windstorm, lightning, and vandalism. It can compensate for net income loss and ongoing operating expenses during the closure period.
According to a Federal Emergency Management Agency (FEMA) report, 40% of businesses do not reopen following a disaster, and another 25% fail within one year.
Depending on your policy and coverage limit, some of these expenses could include:
- Utilities (hydro, electricity)
- Mortgage, rent, or lease payments
- Tax and loan payments
- Cost of moving to a temporary location
- Employee payroll
- Lost profits
- Repairs and construction for rebuilding
What is not covered by BI Insurance?
BI insurance helps to protect you against loss events, such as floods, windstorms, earthquakes, fire, and other perils. You can also get protection from other unexpected events that hurt your operating ability. Examples include:
- A fire at your top supplier’s warehouse.
- A top customer experiences a disaster, preventing them from buying from you.
However, BI Insurance does not cover all expenses. Here are some of the events that would not be covered under a BI policy:
- Terrorism
- Pandemics or infectious diseases
- Floods
- Earthquakes
- Pollution damage
- Recovery of income not on your financial records
What is the cost of BI Insurance?
Insurance for business delay can vary greatly, depending on the size and type of business. Estimates for an add-on endorsement can run between $100 and a few thousand annually. Insurance companies may also automatically provide this coverage under your commercial property insurance policy.
Factors that influence your premiums are:
- Revenue: Your revenue can impact your Business Interruption insurance quote because insurers must provide more compensation to replace your net income. Therefore, the more you make, the more you’ll pay for insurance, as you will also need more coverage if anything happens.
- Type of business: Different industries carry different risks. The higher the risk of making a claim or relocating the company because of a claim, the higher the premiums will be.
- Location: Locations more prone to crime or damaging weather will have higher premiums. For example, flood plains and regions that see severe wind storms can raise the cost of coverage.
- Covered perils: See the above list of types of BI insurance.
- Your insurer: Review your policy to make updates and changes to your policy as your business grows. Speak with your isure broker to discuss alterations in coverages annually.
- Number of employees: The more employees you have, the higher your insurance quote will be. More employees expose you to more risk, especially with new employees who may not have the same experience.
- Business insurance history: Multiple claims in the past can raise the price of your Business Interruption insurance because insurers look at your history to predict whether you’ll be making a claim later on.
Preparation helps to prevent losses
As the old saying goes, “You can’t control the weather,” but you can prepare for disasters and other loss events that could impede your ability to operate your business. Some examples are:
- Business Interruption insurance: Add this endorsement to your policy to provide you with additional financial protection.
- Know your policy: Be aware of threats and review your policy to ensure coverage to offset potential risks.
- Have a contingency fund: Put aside funds to serve as backup reserves that you can draw from in the event of a disaster.
- Create a continuity plan: A continuity plan will help you be more agile. It will also allow you to recover quicker and limit the effects of a disaster.
More about Business Interruption Insurance
Does this type of insurance cover closure due to a pandemic?
This insurance is designed to cover physical loss or damage. Unfortunately, most policies do not list pandemics, infectious diseases, or government-mandated closures as covered risks under BI insurance.
Is BII included under Commercial Property Insurance?
Business interruption coverage can usually be included under your commercial property insurance. If you don’t have commercial property insurance but still want BI insurance, speak to our isure representatives about adding it on as a rider to your existing policy.
What is the indemnity period for business income insurance?
Your business delay coverage should last for the duration of your indemnity period—the time it takes to restore your business. Typically, this begins the day your business operations stop due to the damage and ends the day all repairs are completed and you can resume operations.
Most policies offer a 12-month indemnity period, but this period could be extended based on the amount of time needed to get back up and running. The indemnity period, however, needs to be a reasonable length of time in the eyes of your insurance company and will be outlined in the policy.
Is there a BI insurance deductible?
It depends. Some policies include a deductible, and the amount will vary depending on your insurer and other factors.
What is the waiting period for this type of claim?
Most policies have a 72-hour waiting period for Business Interruption insurance to kick in. You cannot start recovering lost income until after meeting the 72-hour closure threshold.
Our professional insurance brokers at isure understand that no two businesses are alike, and that is precisely why our insurance solutions are customized to match your business needs. Call isure today to discuss if Business Interruption Insurance is needed for your policy!
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