How to Determine the Amount of Business Interruption Insurance Needed

Business interruption insurance is both a sound and necessary investment. If an unexpected event causes your business to be closed for a long time, business interruption insurance can help cover necessary costs and provide some income. Without knowing how long your business will be closed or for what reason can make it difficult to determine how much business interruption insurance you should carry. There are, however, some standard things to consider in order to figure out how much is needed.

Things You'll Need

• Annual financial records
• Detailed inventory of stock and equipment

Instructions

1. Assume that in the case of a natural disaster or an unexpected debilitating event (such as a fire), your business will be shut down for at least a year. Ideally you'll be up and running way before the conclusion of that year, but especially in the wake of a widespread natural disaster, it may be difficult to rebuild quickly.

2. Determine what types of coverage will be needed to keep you afloat. There are typically four types of business interruption insurance: business income coverage, extra income coverage, contingent business interruption coverage and civil authority coverage. You can purchase any of these or any combination of them that would make sense for your business.

3. Peruse your annual financial records and get a sense of your annual net profit. These records will not only be needed by your insurance company, but you also should have an approximate idea of how much profit you make (and would therefore lose) during a typical year. Purchase enough business income coverage to cover at least this amount of revenue.

4. Ask for an appraisal of your office building or other operating location. The amount of money it would cost to rebuild from the ground up should help determine the amount of extra expense coverage you will need in your policy.

5. Take a detailed inventory, not only of your product stock, but also of your existing office equipment. This, too, can be used to calculate how much extra expense coverage you will need.

6. Get a sense of how much revenue stream would be lost if you were unable to receive your product from your main supplier or if your main customers were unable to buy from you. Both situations would be covered under contingent business interruption coverage, but only if the reason is related to damage--at the associated business' property--significant enough to halt business operations.

Tips & Warnings

• Business income coverage will pay for the net profit before taxes and operating expenses, including payroll.

• Extra income insurance will cover the expenses necessary to run your business at a different location.

• Contingent business interruption coverage will cover losses incurred through damages affecting an associated business.

• Civil authority coverage covers revenue lost when the police or other government entity won't let you into your business due to the interruption of a nearby business.