Business Interruption Insurance: 5 Things Every Business Owner Should Know

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If you’re a business owner, you’re aware for sure that running a business isn’t a walk in the park – unless that park is a Jurassic Park.

Next to effective strategies to boost your profits, you think about the people who are dependent on your business, from your employees to your clients and suppliers. You think about paying the loans. You think about tax duties. You think about how to grow your business with the resources you have now.

With that in mind, have you ever thought about what would happen if you fail to operate due to misfortunes like fire, flood, and natural disaster? If you don’t have income, how would you pay off your people, your rent, and other financial responsibilities? That could happen, and you’re doomed if you’re not protected.

Enter Business Interruption Insurance, a policy designed to mitigate the financial effects of a disruption caused by natural disasters. If you own a business, here are 5 things you need to know about this attractive insurance policy.

1. What is Business Interruption Insurance?

Business interruption insurance is a type of policy designed to replace the business income lost due to an event that severely disrupts business operations. Some of the unfortunate events include fire, storm, and other massive natural disasters.

2. How to buy business interruption insurance?

Business insurance isn’t sold as a separate policy – it’s either added to a property insurance/casualty policy or included in an all-inclusive package policy, known as a Business Owner’s Policy (BOP).

3. How is Business Interruption Insurance different from Property Insurance?

Let’s say you’re running a small café and a big storm hits the city. The restaurant has been flooded. The storm left you with a broken roof, badly soaked upholstery, and damaged coffee machines. You’re offline for a week.

Property insurance covers the physical damage to your business, including damages to your building and equipment, and loss of properties. Business interruption insurance, on the other hand, covers the income loss, making sure your finances are protected if things go wrong.

These two policies go hand in hand, with business interruption insurance paying out if the cause of the income loss is covered in the underlying property casualty policy. The amount of payable is often based on the business’ past financial records.

4. What may be covered by Business Interruption Insurance?

Business interruption insurance is designed to put the business in the same financial position it would’ve been if the damage or loss had not occurred by covering the following costs:

  • Profits. The policy covers the shortfall of your earnings during the interruption of business operations. Business interruption insurance policy provides reimbursement for profits that would’ve been earned during the time the business is out of action. The coverage is based on your previous month’s performance.
  • Fixed business costs. These include day to day operating expenses and other incurred costs of doing business, like supply costs, rent, and financing costs.
  • Temporary location. If the property damages interfere with your business operations, the policy may cover the costs associated with moving to and operating from a new, temporary location.
  • Service interruption costs. These costs include power, gas, water, telecommunications, and other utility services which may be disrupted by service providers.
  • Commission and training cost. Your business may need to replace machinery and retrain employees on how to use them. The insurance policy may cover these expenses.
  • Employee wages. Your employees are the backbones of your business and you can’t afford to lose them. Business interruption insurance pays wages to your staff even if the business isn’t up and running.
  • Extra costs. The policy will provide reimbursement for any reasonable costs (apart from fixed costs) which may be crucial for your business, allowing it to continue operating while the property is being restored.
  • Other financial responsibilities that can’t be delayed. Business interruption insurance can help you settle your financial responsibilities on time. These include taxes and loan payments

5. How long will Business Interruption Insurance provide coverage?

Of course, these benefits don’t last forever. The policy has an indemnity period, which refers to the specific length of time (months) for which the benefits are payable under the policy.

The factors influencing the indemnity period differ from business to business, but there are major considerations:

  • Reconstructing of the building/site
  • Restoring of the plant and equipment
  • Rebuilding of the customer base

The indemnity period is often the most critical component of measuring business interruption loss.

On average, the indemnity periods are 6M (months), 12M, 18M, 24M, and 36M. After the maximum indemnity period has expired, there’ll be no further coverage for your business. With the right strategy, these periods should be enough for your business to get back on track.

Author Bio: Carmina Natividad is one of the daytime writers for Insurance Advisernet NZ, one of the largest and most reliable general insurance businesses in New Zealand, providing high-quality risk management advice for business owners. She enjoys writing practical tips and tricks, making complex finance and business topics easier to digest.