What Is Business Interruption Insurance Coverage?
Business operations are subject to interruptions due to unforeseen circumstances. Fire, natural disaster, industrial accidents or similar circumstances can have a significant impact on continuity of services and business income. Closing a business for restoration, other than a brief power outage, can put the business in an unknown status. Vital to economic existence, business interruption insurance is necessary for every company’s business portfolio.
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Definition
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Business interruption insurance reimburses your company when functions are halted due to hazards outlined within the policy. Coverage does not replace property damage insurance. Protection may be included in an insurance package policy or as an extension to property coverage.
What Is Covered?
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Coverage for business interruption includes income loss and, based on financial history, loss of revenue. If you must close the business due to an event such as a chemical leak, your policy pays for the anticipated income. Reimbursements for expenses are also covered, such as utilities, vendors and any other services required for operations. Expenses for operating at an alternate location may also apply during recovery.
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Deciding Policy Limits
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Maintaining adequate coverage is important to keep your business running. A business interruption claim totaling $653,000 on a policy with a limit of $500,000 leaves $153,000 that has to be paid out of pocket. Insufficient limits can result in the business becoming responsible for paying any financial balance needed to restart operations. In addition to an interruption, high out-pocket-costs could prevent the restart of your company. Evaluating risk exposures should provide information on how much coverage is needed.
Assessing Risk
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Risk management is critical when preparing a business insurance package. Knowing what aspects of the business are vulnerable tells decision makers what type of risk strategies may avoid over-expenditures. The level of risk for a demolition company is higher than risk levels for a coffee shop or deli, for instance. When risks are not evident, risk assessment tools assist in determining risk levels.
Considerations
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After you review coverage needs based on finances and operations, additional factors may need to be considered. Increased climate changes have initiated insurance industry efforts to improve catastrophic risk management. Policy holders benefit from learning about advanced products and incentives, such as green building material discounts and low-emission-vehicle class rates, to reduce exposure. Also, extra expense insurance is an option that provides protection from moderate losses to prevent any pause in business operations. Coverage may stand alone without business interruption insurance.
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References
- Insurance Information Institute: Do I Need Business Interruption Insurance?
- National Association of Insurance Commissioners: Disaster Planning for Small Business
- International Risk Management Institute: Addressing the Full Spectrum of Risks
- National Association of Insurance Commissioners: Catastrophic Risk
Resources
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