Reasons to Get Business Interruption Insurance
What Is Business Interruption Insurance?
A business interruption insurance is a coverage designed to replace business income loss in case of a disaster. Such events can’t be predicted and can vary – from fire, floods, tornados, but also to pandemics such as the one we’re facing at the moment. This type of insurance isn’t sold as a separate policy but is usually added to a property or casualty policy or is included in a comprehensive package policy.
A business interruption insurance policy will replace the lost income in case the business has stopped operating due to a physical loss or damage of any type. If you decide to take this insurance, it will cover operating expenses, moving to a temporary location if needed, taxes, payroll and loan payments.
In some cases, this kind of business insurance policy can apply if a civil authority shuts down the business because of physical damage to a nearby business. Standard coverage doesn’t refund policyholders in case the business is closed because of a pandemic. Be sure to check specific exclusions for losses due to cases like bacteria or viruses.
What Does It Cover?
Most business interruption insurance policies cover profits, fixed costs, temporary location, commission, training costs and extra expenses.
Let’s check these in details.
- Profits – The policy will provide coverage for profits that would have been made if the event had not occurred.
- Fixed costs – These include operating expenses and other incurred costs of doing business.
- Temporary location – Some policies will cover the costs involved with moving and operating from a new temporary location.
Commission and training costs – When the business interruption event occurs, the company will often need to replace the machinery and retrain their staff on how to use the new machinery. A business interruption policy can also cover these costs. - Extra expenses – This insurance provides compensation for reasonable expenses that will enable the business to continue working until it can stand back on its feet again.
- Civil authority ingress/egress – The event that interrupted the business may lead to a government-mandated closure of the business premises that will affect the financial loss. Such examples are street closure or curfews.
- Employee salaries – The coverage of wages is crucial if the business doesn’t want to stay without its employees. The coverage will help you keep the payroll going even the business doesn’t operate.
- Taxes – Businesses are still required to pay taxes even in case of a disaster. The tax coverage will make sure the business can pay its taxes to avoid penalties.
- Loan payments – If the business has loans, the coverage will help it to cover these payments even when its income is on hold.
What to Consider When Buying a Business Interruption Insurance Policy
Calculating Business Interruption Policy
Sometimes it can be hard to estimate a business interruption. A standard estimate for the maximum indemnity period is 12 months, but in reality, this is quite a short period. Business owners should allow sufficient time to rebuild premises and customer base as well as to replace stock. It’s best to get expert advice or hire an experienced broker who will help you avoid underinsurance and potential business closure.
Limitations of Business Interruption Policy
Before you start, there are various underinsurance mistakes that you should consider. Let’s say you have a fast-growing business; it’s important to document and prove that the income you had each month before disaster stroke was enough for future projects. You’ll have to state the types of business interruption that you want to cover and must be insured against such disasters in your main business insurance policy.
Keep in mind that disastrous events or loss of utilities are often excluded from these policies. If your business relies on utilities like gas, oil, water or electricity, be sure to add contingency business interruption insurance to your main business policy.
Increased costs of working or increased costs of replacement of certain machinery may be experienced after a disaster. These costs may also include additional rent on temporary premises, extra wages for your staff and so on.