What Is Business Interruption Insurance?

What is business interruption insurance?

Business interruption insurance kicks in when a business can’t operate normally because a specified peril caused physical property damage, rendering the business inoperable. It covers operating expenses and other lost income for a specific period after the business shuts down. The policy spells out the type of unforeseen events that qualify for coverage.

You can obtain this type of business insurance as a stand-alone policy from any of the best liability insurance providers. You can also include it in your business owner’s policy (BOP) or purchase it as an insurance rider or endorsement to add to a commercial property insurance policy or package.

What does business interruption insurance cover? 

Most business interruption insurance providers typically cover the following perils: 

• Theft
• Fire
• Wind
• Falling objects
• Lightning

You must read your business interruption insurance policy documents carefully to understand precisely which perils your insurer covers. Here’s an example:

“We will pay for the actual loss of business income you sustain due to the necessary suspension of your ‘operations’ during the period of ‘restoration.’ The suspension must be caused by the direct physical loss, or damage, to property at premises … The loss or damage must be caused by or result from a covered cause of loss.”

Typical business interruption insurance policies include the following coverage areas, which may deviate slightly according to a carrier’s formula for calculating financial losses:  

• Lost revenue based on prior financial records
• Mortgage, rent and lease payments
• Employee payroll
• Taxes and loan payments due during the covered period
• Office relocation costs if the business must move to a new or temporary location due to physical damage to the business premises

Types of business interruption insurance

Small business owners should understand business interruption insurance types to know what coverage best suits their small business. Different policy types may include or exclude specific items. Below are common coverage options for business interruption insurance.

Business income coverage

Business income coverage replaces lost income and covers ongoing expenses when a business temporarily shuts down due to a covered loss. It addresses revenue loss, payroll, rent, taxes and operational costs incurred during the closure period.

Extra expense coverage

Extra expense coverage helps with costs not covered by property insurance as your business recovers from a disruption. This financial support helps businesses stay afloat during repairs, ultimately staving off a permanent closure. 

Contingent business interruption coverage

Contingent business interruption coverage safeguards a business against losses resulting from third-party vendor disruptions. For instance, if a hurricane floods a supplier’s warehouse to the point of needing to pause equipment deliveries, this type of insurance would compensate for any income lost during the closure. 

Civil authority coverage

Civil authority coverage protects a business’s losses from closures or restrictions imposed by the government. While property insurance covers a closure due to damage, it may lack income coverage for any loss in revenue after the closure. Including civil authority coverage further extends business interruption coverage but often comes with time limits and a waiting period.

Business interruption insurance example

Let’s say a fire damages your warehouse, leaving the building uninhabitable and destroying merchandise already packaged to send to customers. There are two primary ways business interruption coverage can reimburse you:

1. Reimbursements for lost income: Business interruption coverage can help reimburse your business for lost income from destroyed merchandise (typically minus prepaid expenses). Insurers may base reimbursement amounts on a business’s pre-loss earnings. Lost earnings – the actual loss sustained – are equal to revenue minus ongoing expenses.
2. Reimbursements for extra expenses: Business interruption coverage could reimburse your business for additional expenses during the restoration period that wouldn’t have occurred without a physical loss to the business’s actual or personal property due to the covered peril. For instance, if you must temporarily relocate your business because of the fire, the cost of rent at the temporary location could fall under this category. You can also use extra expense reimbursements to pay overtime, if necessary, to restore the operations. 

Carefully review your business interruption insurance policy because the insurer will have its own specifics on calculating lost income. Accounting criteria for lost income and expenses can include the following:

• Net income (net profit or loss before income taxes) that would have been earned or incurred by the insured party if the business were fully operational 
• Normal operating expenses incurred, including ongoing payroll, vendor and lease obligations, that continue despite the operational shutdown

What is a restoration period?

Your business interruption coverage likely has a restoration period – the time your policy will help pay for lost income and extra expenses while you reconstruct or restore the property to its original condition. 

Read your policy documents to understand when your restoration period starts and how long it lasts. To qualify for insurance reimbursement, the restoration period typically begins when the peril occurs and ends after a reasonable amount of time for the property to be restored and operations to fully resume.

For example, if your business was damaged on Oct. 1, you’d obtain business interruption coverage benefits until Oct. 1 of the following year, even if your policy expires before then. Your policy might end because your business was heavily damaged, and you may not have a business to insure. 

If your business’s building repairs aren’t completed before the 12-month restoration period ends, your business interruption coverage will expire. This means you’d stop receiving reimbursement for lost income, for example. Check your individual policy for specifics.

Endorsements and extensions

When reviewing your business interruption coverage with a broker, you may want to discuss whether the following overages are included or can be added with an endorsement:

Extended period endorsement

Business owners experiencing difficulty during the restoration period can seek an endorsement that includes a 30-day extended restoration period provision. 

For example, if an insured business needs more time to restore the property beyond the 30-day limit, it can buy an extended period of optional indemnity endorsement for various periods, ranging from as little as 30 days or any multiple of 30 days up to 720 days. Check with your provider for specifics. 

Coverage extensions

A coverage extension provides insurance for business income losses resulting from specified events, such as service interruption, contingent business interruption, leader property interruption and interruption by civil or military authority (for example, if a local, state or federal governmental entity restricts access to your property). A sublimit typically applies for each additional coverage. 

You can include a service interruption extension in the policy, so ask your insurance provider for details. A service interruption extension typically provides business income coverage arising from direct physical loss, damage or destruction to any utility service’s transmission lines and related plants, substations and equipment supplying services to an insured business. 

Restrictions may apply, such as waiting periods, distance limitations, the exclusion of certain perils, such as earthquakes, and exclusions for overhead and transmission lines. The owners, managers or operators of such utilities or services are not named as insured under the policy. Again, check your policy specifics. 

Loss limits and exclusions 

When a business income loss occurs, an insured business is obligated to take reasonable steps to prevent or minimize this loss and any further losses. Expenses incurred to reduce that loss may be covered under the policy as part of the business income loss as long as these expenses don’t exceed the actual loss. 

For instance, if there is a business loss of $200 associated with the interruption of business operations, the insurer could reimburse $100 to reduce the loss but will not reimburse the business $100 if the claim is reduced by $50. If the business incurs other expenses above this claim amount to continue operating the business, those could be covered under an additional expense provision if one is included in the insurance policy. 

Policy specifics

It’s crucial to note policy verbiage and specifics. For example, insurer CNA’s policy details require “a direct physical loss” or damage that interrupts your business to qualify for coverage. Terms and exclusions may also limit or preclude coverage. 

This “direct physical loss” and exclusions verbiage may determine whether the policy is upheld or denied in court. 

Manufacturers should take note of exclusions for losses associated with pollutants and contaminants and information about deductibles, waiting periods and policy limits. This information is on the declarations page or within the section detailing your coverage.

Who should get business interruption insurance? 

Retailers and businesses in the manufacturing and service industries should consider business interruption insurance. Any business that provides a service or goods should also consider this coverage. 

Speak with an insurance representative or agent about your specific business. You should consider several factors when opting for business interruption insurance, including the following: 

• Any potential risk associated with your building’s location
• Safety protections 
• Added precautions to secure your premises, such as security cameras, sprinkler systems and fire alarms 
• Potential temporary locations for your business

How much does business interruption insurance cost?

As with any business insurance policy, costs depend on underwriting standards, your business’s size and numerous other factors, including the following: 

• Industry
• Number of employees
• Amount of coverage
• Prior loss experience
• Geographical area

Contact an insurance broker or agent for specific business interruption insurance quotes. 

Business interruption insurance premiums usually range from $40 to $130 monthly. Rates can be higher for businesses with high liabilities. 

Where can I buy business interruption insurance? 

You can purchase business interruption insurance via major insurers that cover commercial liability. Before purchasing a stand-alone policy for business interruption insurance, find out if you have existing coverage. 

If you already have a BOP with your insurance company, check the policy details to see if business interruption coverage is included. Also, see if your general liability policy has an endorsement for business interruption insurance. 

Business interruption insurance typically has a coverage limit, the maximum amount your insurer will pay toward a covered claim. You’ll pay out of pocket for any financial losses that exceed your coverage limit, so ensure the coverage amounts you elect are appropriate for your business, and speak with your insurance agent if you need additional coverage.

As always, discuss any concerns with your insurance agent, and refer to your company’s risk management plan to ensure adequate coverage. 

Nicole Urbanowicz contributed to this article.