Disaster is largely unpredictable and can strike a business at any time no matter how well it might be doing. One way businesses avoid this unfortunate path is by investing in business interruption insurance ahead of time.
Business interruption insurance, sometimes referred to as business income coverage, helps replace lost income and helps a business stay afloat during an unplanned disaster such as a fire. This type of insurance usually comes as part of a comprehensive policy package or is added to a property/casualty policy. Being forced to close a business temporarily is a stressful ordeal in itself and you may be wondering if this is a worthwhile investment. We’ll explain the ins and out of business interruption insurance and what exactly the policy covers below.
What Does It Cover?
Business interruption insurance covers operating expenses, relocation expenses, loan payments, taxes, employee payroll, and more. Every insurance policy is different, but normally covers any expenses that accumulate as the physical property is being rebuilt or moved to a new location.
Damage from natural disasters such as wildfire, hurricanes, hailstorms, lightning, tornado, or windstorm are common weather events covered under the policy. In the event of a riot, forced government closure, theft, civil commotion or vandalism, certain policies will cover these situations as well. These policies tend to last up to 12 months, but in some cases, continue until 24 months.
What Doesn’t It Cover?
Business interruption insurance doesn’t cover flood or earthquake damage, which is usually covered by other policies. Let’s say you have certain items such as broken glass from a weather event, this insurance won’t cover that as well. Damage or income loss due to viruses, pandemics or diseases such as COVID-19 aren’t covered by this type of policy. Business interruption insurance won’t cover utilities and undocumented income that isn’t listed on your financial records.
How Much Does It Cost?
The cost of business interruption insurance largely depends on several different factors, including your industry, number of employees, amount of coverage, and previous claims filed. The cost could increase or decrease based on your location as well. According to Insureon, the average business interruption insurance policy costs anywhere from $480 to $1560 per year or $40 to $130 per month.
Who Needs Business Interruption Insurance?
Business interruption insurance is usually best suited for small businesses, that might not possess the financial means to bounce back from a disaster compared to a much larger business. If you have a business that relies on a physical location or you let’s say you own a property with valuable assets such as machinery or equipment that produce your products, then this is the right insurance for you. Some common types of businesses that would benefit from this insurance include restaurants, salons, spas, retail stores, dog groomers, gyms, etc.
Once your business interruption insurance begins, you enter something known as a “restoration” period. This is the length of time your policy lasts and will cover various expenses. Normally, it takes 48 to 72 hours of waiting before the restoration period begins. This typically lasts 12 months, but can be extended to 24 months depending on your specific policy. If you fail to complete the repairs for your business during the restoration period, your insurance will expire and no longer cover any expenses you accrue.
Extra Expense Insurance
If you want to cover all of your bases, you might want to consider adding on extra expense insurance, which is an optional part of business interruption insurance. This will cover any extra expenses that go beyond the normal day-to-day operating expenses. This could include leasing equipment, paying employees overtime, renting out a temporary place of business, and the replacement of furniture, hardware, and technology. Sometimes, you can bundle extra expense insurance as a part of your business owner’s policy.
Disasters such as a tornado or a fire are unpredictable and can strike a business at any time, causing them to temporarily shut down. The good thing is business interruption insurance can keep a business afloat during these dire times. According to the Federal Emergency Management Agency (FEMA), about 25% of businesses fail to reopen after a disaster strikes. Business interruption insurance covers a variety of expenses and repairs. Unfortunately, it doesn’t cover damage from floods, earthquakes or pandemics.
This type of insurance is relatively affordable for most businesses, offering both monthly and yearly options. Make sure you’re aware of the restoration period covered in your policy and how much time you have to rebuild your business. If you have a small business, this might be the perfect insurance to get in case of a random disaster. Consider adding extra expense insurance, especially if you predict extra expenses such as paying overtime or replacing furniture. Business interruption insurance is a good idea in general and is the difference in your business surviving any unforeseen circumstances.