Business Interruption Insurance: What it Covers, What it Does Not

Business interruption insurance compensates lost business income in the event of a disaster. A fire or natural calamity, for example, could be the event. Business interruption insurance is not marketed separately, but is either added to a property/casualty policy or incorporated as an add-on or rider in a comprehensive package policy.

Understanding Business Interruption Insurance

Premiums for business interruption insurance (or, at the very least, the additional cost of the rider) are deductible as ordinary business costs. This sort of policy only pays out if the underlying property/casualty policy covers the cause of the company income loss. The amount payable is usually determined by the company's prior financial records.

The duration of business interruption insurance coverage is regulated by the insurance policy and lasts until the conclusion of the business interruption period. The normal policy is 30 days, according to the Insurance Information Institute, but an endorsement can extend it to 360 days.

Most business interruption insurance policies define this period as the time from the start of the covered risk until the damaged property is physically restored and returned to the same state as before the disaster. There may also be a 48-72-hour waiting period.

Types of Business Interruption Coverage

Before we get into what is and isn't commonly covered by business interruption insurance, it's crucial to understand the different types of coverage. This is significant because various forms of coverage may include or exclude certain sorts of claim items. The following are the most prevalent types of business interruption coverage:

• Business Income Coverage: This type of coverage helps to replace lost income and pay ongoing expenses if your company is forced to close temporarily due to a covered loss. It can make up for lost profits, payroll, rent, taxes, and other operating expenses as detailed below.
• Extra Expense Coverage: This coverage helps to pay the additional costs your organization may incur in order to reduce or avoid a shutdown. This could involve renting temporary office space or equipment, compensating non-exempt employees for overtime, or supporting the expense of temporary transportation or relocation.
• Contingent Business Interruption Coverage: This type of coverage protects your firm from losses caused by a disruption in the operations of a supplier or other business partner on whom you rely. For example, if a fire prohibits your supplier from delivering goods to your firm, contingent business interruption coverage may assist in compensating your lost income.
• Civil Authority Coverage: Civil authority coverage protects your company from damages caused by government-mandated closures or other restrictions that prevent it from operating. For example, if your company is forced to close due to a mandatory evacuation order or a curfew imposed by local authorities, civil authority coverage may be able to pay you for lost earnings.

As you read through the lists below, keep in mind that each type of expense may only apply to a specific type of coverage or may only be included if that coverage is selected.

What Business Interruption Insurance Covers

The following elements are typically covered by business interruption insurance:

• Profits: A policy will compensate you for profits that would have been earned had the event not occurred based on previous months' performance.
• Fixed costs: These can include operating expenses and other incurred costs of doing business.
• Temporary location: Some policies cover the costs of relocating to and operating out of a temporary business site.
• Commission and training costs: Following a business interruption event, it is common for a corporation to need to replace machinery and educate employees on how to utilize the new machinery. These expenses may be covered by business interruption insurance.
• Extra expenses: Business interruption insurance will reimburse reasonable expenses (above and beyond fixed costs) that allow the business to continue functioning while it recovers.
• Ingress/egress of civil authorities: A business interruption incident may result in government-mandated closure of business premises, resulting in immediate financial loss. Forcible closures due to government-issued curfews or street closures relating to a covered event are examples.
• Employee wages: Wage coverage is critical if a company does not want to lose employees when closing down. When a business owner is unable to function, this coverage might assist them in making payroll.
• Taxes: Even when a tragedy strikes, businesses must still pay taxes. Tax coverage ensures that a company can pay its taxes on time and avoid fines.
• Loan payments: Loan payments are frequently made on a monthly basis. Business interruption insurance can assist a company in making payments even when it is not earning money.

What Business Interruption Insurance Does Not Cover

According to the website of the Insurance Information Institute, you will not be covered for:

• Items broken as a result of a covered occurrence or loss (such as glass)
• Flood or earthquake damage, which are covered by a separate policy
• Undocumented money that is not reflected in your company's financial records
• Utilities
• Pandemics, viruses, and communicable diseases (for example, COVID-19)

Special Considerations for Business Interruption Insurance

It is important to note that the insurer is only required to pay if the insured genuinely suffered a loss as a result of the interruption. The amount that the business will recover will not exceed the policy's maximum.

Business Interruption Insurance and Pandemics

Not unexpectedly, what business interruption insurance does and does not cover has received special attention during the COVID-19 outbreak and the resulting company shutdowns and curtailments. Unfortunately, policyholders will not be covered in the majority of cases.

"The standard business interruption policy applies only when the business sustains direct physical loss or damage, such as a fire," says James Lynch, FCAS MAAA, chief actuary and senior vice president of research and education at the Insurance Information Institute. "Business interruption can also occur when a nearby business suffers direct physical loss or damage and a civil authority, such as the government, shuts down all businesses as a result."

Viruses do not actually destroy anything. According to Michael Menapace, a partner at Wiggin and Dana and a professor of insurance law at Quinnipiac University School of Law, "the virus...[compared to a fire or broken windows from wind damage], leaves no visible imprint."

Exclusions apply even to all-risk business interruption insurance. And, particularly since the 2003 SARS outbreak, those exclusions have tended to include losses from viruses and communicable diseases, according to Dunsavage.

The Bottom Line

Business interruption insurance is designed to pay you for lost income and increased expenses incurred as a result of a sudden halt in your business operations. Certain situations and conditions, however, may be excluded from coverage under your policy. Make sure you understand your unique insurance to avoid surprises about what might or might not be covered if your business is disrupted.