Understanding Business Interruption Insurance
Posted on: February 2, 2018 by Signature Insurance Group
When a business is forced to shut down operations following a major disaster, the loss of revenue can be enough to potentially close their doors forever. Business Interruption (BI) is an essential component in a business owner’s policy insurance package.
Business interruption insurance, sometimes called business income insurance, is a type of insurance that helps business owners recoup the loss of income that their business has suffered following a major disaster. It is designed to leave a business in the same financial position it would have been in if no financial loss had occurred. Business interruption insurance is different from property insurance in that property insurance only covers the physical damage to the business property, while the business interruption policy covers the actual revenue the business loses or is projected to lose.
What Is Covered Under Business Interruption Insurance?
Business interruption insurance pays for the actual loss of business income resulting from the necessary suspension of business operations during a period of restoration following a major disaster. The suspension must be caused by direct physical loss, damage or destruction to the business’s property following a covered form of peril.
The “actual loss of business income” refers to the reduction in the businesses’ net income due to halting business operations – whether fully or only partially – during the restoration period following a disaster. Business interruption insurance typically includes reimbursement for the following income losses that follow a covered form of peril:
- Profits that the business would have earned, projected based on prior financial statements.
- Fixed costs such as rent or mortgage, taxes, loan payments, and other operating expenses that are not halted while the business property is in restoration.
- Employee wages that the business is unable to cover while in the restoration period.
- Some business interruption insurance policies are written to cover extra relocation expenses such as temporarily moving to a new location to continue operations.
- Additional reasonable expenses, beyond fixed costs, that help the business to continue operating while the property is being repaired.
- Government restrictions such a citywide curfews or forced government closures of buildings or roads that result in income loss.
What Is Not Covered Under Business Interruption Insurance?
These losses are not covered under the typical Business Interruption policy:
- Utilities typically are not covered under fixed expenses, as utility service typically shuts off when a location can’t be used for business.
- Any income that hasn’t been properly documented will not count as lost revenue.
- If the disaster event causes limited damage to business, but doesn’t fully halt operations. For example, a downed tree causes damage to the storage room, but doesn’t cause the business to lose customers.
- Power outages. Most closures due to downed power lines are not covered. Power outages are common following a major disaster, and power is usually restored as quickly as possible.
- Income loss resulting from a non-covered event. Many weather and disaster events are covered under a BI policy, but there are some exceptions. Flood and earthquake damage would need their own separate policies; and voluntarily closures due to things like vacations or family emergencies are not covered.
About Signature Insurance Group
Signature Insurance Group has been working since 1969 to provide comprehensive insurance solutions to individuals and businesses across the United States. We offer a range of insurance products and services in risk management, employee benefits, business insurance, and personal insurance, and we pride ourselves on our commitment to creating “Signature Relationships” with our clients where we commit to providing the best, most comprehensive service possible. To learn more about our goods and services, contact us today at (800) 464-3606.