According to Investopedia, interruption insurance is insurance coverage that replaces business income lost in a disaster. This insurance covers lost income and operating expenses when a disaster forces a business to slow operations or temporarily close down.
Covered events tend to include vandalism, fire, and some natural disasters. However, Business interruption insurance cannot be purchased separately, but as part of a business owner’s policy or added on to a commercial property policy. Many insurers’ property policies include business interruption or business income either as coverage within the form.
Business interruption insurance can be very crucial to a business’s continued success, but reports have it that only 35 percent of small businesses in the United States actually have business interruption coverage. A lot of small business owners neglect business interruption insurance, because they believe that their standard commercial property insurance or general liability policy will cover them.
However, note that commercial property insurance will repair or replace property that’s damaged or stolen. But, it won’t cover lost income or future expenses—which can be very imperative to keep your business going after a disaster.
If you have a brick and mortar business, you are extensively in need of business interruption insurance since you depend heavily on your store and the physical assets inside it. If there happens to be a reason to close down a part or all of your shop, you will have to lose potential customers.
Home – based and online business owners may not have a need for business interruption insurance, but should still consider their situation. According to reports, most homeowners policies won’t cover lost business income. And even though online businesses might have their own physical assets, business interruption insurance can still help if a supplier in the supply chain is affected by a disaster.
Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy. According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days.
Also note that most business interruption insurance policies define this period as the date that the covered peril began until the date that the damaged property is physically repaired and returned to the same condition that existed prior to the disaster. There may also be a waiting period of 48 to 72 hours.
As stated by the International Risk Management Institute (IRMI), there are three major types of business interruption insurance:
3 Types of Business Interruption Insurance Policies
1. Basic Business Interruption
This type of business interruption insurance provides basic coverage to reimburse businesses for a loss of income during the period when they undergo the activities necessary to put the business property back into a usable condition. Have it in mind that most businesses can gain from this coverage even though compensation ends as soon as repairs are completed.
2. Extended Business Interruption
This type of insurance covers a stipulated period between the time repairs are complete and the time when the business starts earning income. Have it in mind that it is possible for some businesses, such as small storefront operations, to start generating income as soon as they can open their doors. However, some other businesses are likely to experience a lag time between the two events and will benefit from a cushion of income for that period with the understanding that it has time limits.
3. Contingent Business Interruption
This type of Interruption insurance is designed to cover an insured’s business income loss resulting from physical loss, damage, or destruction of property owned by others. These typically include direct “suppliers” of goods or services to an insured and direct “receivers” of goods or services manufactured or provided by the insured.
Note that the physical damage to these suppliers or receivers usually is expected to be of a type that would be covered by the insured’s policy had the damage happened to the insured’s property.
Also note that this insurance typically provides coverage for the “direct” relationship between an insured’s “suppliers” or “receivers” of its goods or services. Coverage can sometimes be extended for suppliers of a direct supplier — typically known as “indirect” or “second tier” suppliers. Such coverage may require, among other things, that indirect suppliers are specifically identified.
Naturally, each type of business interruption insurance mentioned above adds premium costs to your business’ bottom line, but in the event of a loss, it is a worthwhile investment. While no company should pay for unnecessary coverage, it is very crucial to work closely with a knowledgeable insurance agent to identify the risk factors associated with your specific business.
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