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Business interruption insurance: How does it work when you're forced to close?

Kim Mercado image
By Kim Mercado
Sep 9, 2021 min read

Remember that old saying, “expect the best, but prepare for the worst?” As a small business owner, while you hope for the best, you also need to plan for what happens when things don’t quite go according to plan. 

This is why having business insurance is so important. But “business insurance” is such a broad term and can encompass many different coverages. For example, there’s general liability insurance, also known as “slip and fall” insurance. There’s workers’ compensation, commercial auto, commercial property and so on.

So what happens when you’re forced to close due to a fire, burst water pipe or a natural disaster? Can insurance help minimize financial losses?

The simple answer is yes if the interruption to your business is considered a covered event by your insurer. (That’s the important part.) Let’s take a closer look at business interruption insurance.

What is business interruption insurance?

Business interruption insurance covers the loss of income your business may experience in the event of a disaster. It’s also known as business income insurance. (FYI, this is what NEXT calls it.)

For example, a neighboring business catches on fire and damages your exterior wall. You might be forced to close for several weeks to make repairs. Business interruption insurance helps cover the revenue you would have earned during that time, as well as ongoing business expenses while you are closed.

Who needs business interruption coverage?

Most businesses operating out of a physical space could use business income coverage. 

Say you have a hair salon, a dog grooming store, yoga studio or offer spa services. Your business often revolves around your work site. With a shutdown of that space, you face a loss of income.

Business interruption insurance is usually only available as part of business personal property and is not available as a standalone type of insurance.

Business interruption insurance coverage

There are a few basic areas that most types of business interruption insurance will cover in a disaster. These include things like:

  • Earned profits: The insurance company will look at your past financial statements to assess what you would have earned during that period. They will cover you accordingly.
  • Temporary location: As you rebuild your business, you will need somewhere to work. Some policies will cover the rent on a temporary location and even the expenses related to relocation costs and operating there.
  • Fixed costs: Even if your office gets destroyed in a fire, you may still have to pay property taxes. The same goes for things like electricity. Insurance may cover these operating expenses and others based on your prior costs.
  • Extra costs: Another business interruption claim is the extra expenses you incur while your property gets fixed. For example, additional office supplies or even a new coffee machine if that’s something your business needs to do business as usual.
  • Training costs: You may require training if you have to use new or different equipment. Business interruption insurance can cover your training expenses.

What’s not covered under business interruption insurance?

While business interruption insurance covers several kinds of situations and types of losses, it’s not the end-all, be-all of insurance. You still may need other kinds of coverage depending on your business. 

Business interruption doesn’t cover:

  • General liability. General liability covers many of the basic risks businesses face. Often called slip-and-fall insurance, it can provide financial help due to claims against your business regarding bodily injury or property damage.
  • Professional liability. Any professional mistakes aren’t covered by business interruption insurance, so you’ll need professional liability coverage. Also known as errors and omissions insurance, this type of coverage can help cover costs if a client says you gave them bad advice, if you made a mistake, or missed a deadline that caused financial harm.
  • Workers’ compensation. Most states require this coverage if you have employees. Workers’ comp covers medical bills for work-related injuries or illnesses, lost wages and more.
  • Commercial auto. Most personal auto insurance policies won’t cover injuries or damages when you’re driving for business purposes. Many state require having commercial auto insurance if you use a business-owned vehicle.

Business interruption insurance costs

Assessing business interruption coverage costs is a bit tricky. Your small business risk assessment and the potential costs to the insurer will determine the price.

That means the cost is often unique to your specific business, making it hard to pinpoint an exact number. That’s also why, generally, you cannot purchase business interruption insurance on its own, as a standalone policy. 

Instead, it’s included when you purchase business personal property coverage. But you can also find it included as part of a general business owner’s policy (BOP).

Activating your coverage

The length of time you have to make your claim depends on the policy. There’s often a brief waiting period before your coverage kicks in. If you have an approved claim under your business personal property policy then business income will activate automatically.

Usually, the insurance company will send someone over to assess the property damage. That person will do a business interruption insurance calculation. They will consider important information like your financial records, lease payments and your projected lost income.

The policyholder will then receive payment to cover expenses according to a set timeframe. (Within coverage limits, of course.) 

The timeframe will usually include a start and end date of when the business is expected to rebuild, repair or replace damaged or destroyed property. The insurance industry refers to this timeframe as a “period of restoration” in fancy policy language. For instance, at NEXT, the period of restoration is six months.

Difference between business interruption and commercial property insurance

Business interruption and commercial property insurance are quite similar at first glance. However, a business interruption policy cannot be purchased on its own without business personal property insurance.

The main difference is that property insurance covers the actual physical damage to your business from unforeseen circumstances. 

Property insurance policies may include repairs or replacement costs for the property’s direct physical loss itself, as well as some or all of its contents. 

Business interruption insurance does not cover the costs of rebuilding or recouping physical property. Instead, it covers profits you would have earned when the business is unable to operate due to damages to your property.

Get a free business income insurance quote from NEXT Insurance 

As a business owner, you know that no matter how much you prepare, unexpected things happen, from a fire to a water main break flooding your area. Business income insurance can provide financial help in case you’re forced to close.

NEXT Insurance offers a wide variety of business insurance coverage, including business personal property policies with business income coverage.

You can handle all your insurance needs, from getting a quote to filing claims, entirely online. Most transactions take less than 10 minutes. You can access your certificate of insurance online, anytime. 

If you have questions, our licensed, U.S.-based insurance professionals can help.

Get your free instant quote today.

Kim Mercado image
By Kim Mercado
Kim Mercado is the managing editor of NEXT's small business blog.
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