With the number of natural disasters in the United States climbing every year, more and more businesses are being impacted by events beyond their control. Superstorms, drought, wildfires and floods caused hundreds of billions of dollars in damages to businesses in 2015 alone, and the cost of January’s historic East Coast blizzard is expected to reach several hundred million or more. Yet, while most small business owners have property and casualty insurance to help them rebuild after such an event, far fewer have invested in business interruption insurance to help them sustain operations as they regroup.
What Is Business Interruption Insurance?
Business interruption insurance is an insurance policy that covers your lost revenue when your business operations come to a temporary halt due to a covered peril, such as a fire. It also reimburses you for many of the costs of maintaining operations at another location if your business is forced to close due to an unexpected event. Typically, the policy will mirror your business insurance policy: For example, depending on the type of business coverage you’ve purchased, you may be reimbursed for a business interruption due to fire or wind damage but not for one caused by an earthquake or flood.
Business interruption insurance covers many, but not all, operational costs. Some examples of what a policy may cover include:
- Relocation costs If you need to move your operations while your business premises are being repaired.
- Lost income while your business is unable to operate or is operating at decreased capacity
- Payroll expenses for employees who continue to work
- Operational expenses that continue even though business operations are temporarily on hold (for example, utility bills.)
Limitations of Business Interruption Insurance
Depending on the type of coverage purchased, business interruption insurance may not cover every expense you incur if your business can’t operate for some period of time. Some expenses that are usually not covered by a standard policy include:
- Expenses that exceed what you were paying before the event occurred: For example, if you need to rent office space in a new location and the rent is $1,000 more than you were paying before, the insurance will only reimburse you for the amount of the old rent.
- Rebuilding costs in excess of the estimated amount
- Costs associated with lost power: Many standard business interruption policies exclude business interruptions due to loss of electrical power or heat. However, you typically can purchase a rider to add this type of coverage.
- Losses associated with a business interruption in your supply chain:. For example, if a tornado in another state destroys the warehouse that provides an essential component of a product you sell, your revenue would be impacted significantly. However, because your business premises were not affected, a standard business interruption insurance policy will not cover your loss.
- Losses associated with provider services: For example, if your website is offline for several days because your hosting provider’s servers were destroyed by a hurricane, you are likely to lose business and revenue as a result. Nonetheless, a standard business interruption insurance policy will not cover that loss.
Additions to Standard Coverage
Although standard policies will not usually cover the above events, there are some additional coverages you can buy. For example, “contingent business” insurance will reimburse you for revenue lost due an interruption in your supply chain (as in the scenarios above.) Similarly, an “extra expense” rider can help defray unexpected costs, such as increased rent, excess building costs or costs associated with moving and storing inventory.
How Much Business Interruption Insurance Do You Need?
To calculate the amount of business interruption insurance you need, first determine your net revenue. Then, think about how day-to-day operations would be affected in the event of a catastrophe and envision what expenses you would incur and what might be on hold.
For example, could some of your operations be handled remotely by your existing employees? If so, think about who those key employees are and what you would need to pay them for their time. Would you be able to move operations to a temporary location until the business premises are repaired? If so, where would you rent and how much would it cost? Consider, too, the cost of business equipment rentals and other associated operational costs, such as storage space or getting cell phones for your employees until landline service is restored.
On the other hand, some expenses may stop temporarily if your business premises are destroyed. For example, if you are not occupying the building for some period of time you will save money on gas, water and electricity bills.
Bear in mind, too, that typical business interruption insurance policies have a waiting period of several days before coverage kicks in, so you will need to have cash on hand to cover expenses for between 48 and 72 hours.
Obviously, business interruption insurance is important coverage that every business should have, but figuring out the amount and type of coverage you need can be confusing. Don’t try to handle this complex decision on your own; our business insurance experts are here to help. Call us at 516-292-3780 any weekday between 9 a.m. and 6 p.m. to schedule an appointment for your insurance review. Or if you prefer, request a free consultation online now.