Business Interruption Insurance For Small Enterprises
Business Interruption Insurance, or BIP, protects small businesses against financial loss due to temporary shutdowns and reduced operations. BIP policies typically come as part of larger Business Owners Policies but may also be purchased separately.
To activate the business interruption portion of a policy, physical property must sustain direct damage from one or more covered perils such as fire, wind or rain.
What is Business Interruption Insurance?
Business interruption insurance provides your company with financial protection should its operations become impaired due to a covered peril. It may also cover extra expenses like payroll, moving costs and training fees while you await reopening.
Your policy will typically cover a percentage of your gross profit, ongoing expenses and extraordinary expenses while being prevented from operating your business due to covered perils, up to its policy limits. It often links up with commercial property insurance or other forms of coverage; physical damage such as fire or flooding could trigger it causing operations to cease altogether.
There are multiple ways to obtain this coverage, but one popular solution is known as a Business Owner’s Policy (BOP). A BOP bundles general liability and commercial property coverage for small-to-midsize businesses with 100 employees or fewer and revenues of less than $5 million; its overall costs may be less expensive than purchasing these coverages separately and it helps ensure that proper limits are in place.
When purchasing a BOP, your business interruption coverage typically requires a waiting period or “restoration period,” typically starting within hours of damage occurring and ending when your property has been repaired and reasonably restored. You can learn more about its specifics by reviewing your policy or speaking to an agent.
As another important question to ask yourself when considering business interruption policies is whether they cover losses due to COVID-19 or other pandemics, generally no. “Most standard business interruption policies don’t cover pandemic-caused losses,” states Friedlander. Additionally, insurers began adding pandemic and virus exclusions after SARS’ outbreak in 2003.
Business interruption insurance may be purchased separately, or as an endorsement or rider to commercial property or other types of policies. When purchasing this coverage it’s essential that an experienced, knowledgeable agency takes the time to assess your unique risks and recommend appropriate coverages.
How Does Business Interruption Insurance Work?
Business interruption insurance generally provides coverage for expenses related to a forced closure due to fire or severe storm damage, including rent for temporary locations or extra expense insurance policies to cover expenses incurred while your business remains operational yet fails to generate revenue.
Business interruption coverage is an optional element of commercial property policies and can typically be purchased for as little as $15 a month. Other parts of a commercial property policy package may include general liability protection against claims for bodily injury or property damage caused by an event at your place of business; and commercial property coverage which protects tangible assets used by your business like furniture, computers, inventory tools as well as valuable papers and records.
Business interruption insurance isn’t mandated by state laws, but many businesses choose it to mitigate financial disaster in the event of a catastrophic loss. Each policy differs slightly; most policies provide at least a year’s income replacement coverage.
Calculate the need for business interruption coverage by estimating your annual revenue and cost associated with continuing to operate at its original location for that time period. A typical policy provides for a 48 to 72-hour restoration period in which income coverage kicks in; and extra expense coverage, which covers other costs such as renting equipment, paying non-exempt staff overtime rates or advertising to alert customers where your temporary location might be.
Tax coverage is another essential feature of a business interruption policy. Even after being forced to close down and stop generating revenue, taxes still need to be paid on damaged properties and inventory – such as those involved with fire, flooding or theft. A policy can pay your tax obligations and even assist in meeting community development or SBA loan obligations when your company was forced to shut down.
What is Covered by Business Interruption Insurance?
Business interruption policies typically offer protection for lost income and expenses related to damage or loss to your company’s properties that disrupts operations, such as rent, payroll, taxes, inventory supplies or more. Your agent can help determine what expenses might need coverage should your company experience any interruption.
To qualify for business interruption insurance, your property must experience direct physical damage that effectively suspends operations – for instance a fire burning down your restaurant kitchen or a hurricane taking out roof tiles at your retail store. Your insurer and you must also agree on an acceptable duration period, typically 72 hours or longer (known as “the restoration period”). It is an integral component of every policy offering this coverage.
As fire, aircraft collisions, natural disasters and power outages are among the leading causes of business interruptions, the top threats include fires, aircraft collisions, natural disasters and power outages. Although most policies exclude loss due to employee fatality from being covered under their policy, it would be wise to discuss all potential risks with your agent so you can decide whether to purchase additional coverage against these hazards.
Misconceptions about business interruption coverage often include that it will cover the costs to relaunch after disruption, yet not those to reopen it after destruction caused by same event that interrupted it originally. Therefore, both types of coverage must be maintained to cover both potential damages. For complete peace of mind and financial protection during difficult times.
Some insurers provide an endorsement for additional business interruption insurance that can be added to a commercial property or general liability policy. This coverage typically covers costs associated with hiring contractors to repair a building so you can reopen, as well as additional expenses like boarding up broken windows and hiring temporary workers to restock shelves – often less costly than purchasing standard policy business interruption insurance coverage itself.
How Do I Get Business Interruption Insurance?
If you don’t already have business interruption coverage, speak with your insurance agent about adding it to your commercial property policy or purchasing a stand-alone policy. In order for either option to pay out, any disruption must have been caused by one or more perils covered under your commercial property policy, such as fires or property damage; flood or earthquake damages would typically require separate policies as they typically aren’t included within existing policies.
To qualify for a payout, the forced closure must last at least 72 hours and cause complete loss of access to property for it to qualify as an approved claim. Shorter interruptions such as power outages or utility service disruptions typically aren’t covered; such issues tend to be covered under cyber insurance or business continuity plans instead.
Cost of business interruption insurance policies can vary dramatically, depending on your risk and location of business operations. Your insurance agent can provide a quote for this coverage and may recommend that it be combined with other products for more cost-effective solutions, such as general liability and business interruption policies being combined into one comprehensive package that often costs less than buying each type individually.
Business interruption policies provide cover for expenses such as employee wages, loan payments and taxes incurred as a result of disruption, while most policies pay out for up to a year after such incidents have taken place. This coverage can be especially useful for smaller firms that rely heavily on revenue for payroll payments and other essential costs.
Though most small businesses are not required to close for extended periods of time, it is still crucial that they review their insurance coverage regularly. If your industry entails high risks or you own expensive equipment or inventory which could be lost during a disaster scenario, business interruption policies might be worth exploring as part of an overall insurance strategy. A Business Owner Policy (BOP) offers comprehensive protection that covers commercial property, general liability and business interruption risks.
References
https://www.investopedia.com/terms/b/business-interruption-insurance.asp
https://www.insureon.com/small-business-insurance/business-interruption
https://www.thehartford.com/business-insurance/business-interruption-insurance