Business interruption insurance, also known as Time Element insurance, is probably the most valuable coverage your business can have. It is a coverage that is frequently overlooked by many business owners. If your business was affected by an event such as wind, water or a fire, standard property insurance would not cover the loss of income caused by the temporary closure of your business. Business Interruption Insurance is designed to cover such losses and can be equated as disability insurance for a business.
Business interruption insurance covers the loss of income (net profit / loss before income taxes that would have been earned and extends to current payroll) that a business suffers after a disaster while its facility is either closed or being rebuilt. A disaster could mean a complete or partial loss in revenue, depending on the time frame and the extent of the damage.
Why should you buy it?
Property insurance only covers the physical loss or damage to the location and contents of a business. It does not cover the loss of income or associated fixed costs. Having Business Interruption coverage may make the difference between your business re-opening or having to close the doors forever. There are three main reasons for purchasing this coverage:
- To protect ongoing and continuing expenses
- To retain key employees
- To retain customers
How much Business Interruption insurance do I need?
This is a question for you to discuss with your agent. There are many factors that affect what the appropriate coverage for your business will be. Some factors that you must take into consideration include:
- How easily you can continue operations in a temporary location
- How long your business might be disrupted
- Your ongoing expenses
What circumstances must be met to utilize my Business Interruption insurance?
There are three requirements that a disaster must meet in order to use your BII.
1. There must be physical damage to the premises that force the business to temporarily suspend its operations.
2. The physical damage must occur at the property that is listed on the policy.
3. The damage to the property must be a result of a covered cause of loss.
What is covered by Business Interruption insurance?
When you purchase Business Interruption insurance, there are standard costs that are covered while your business gets back on its feet.
- The income your business would have made during the period your business location is unusable. This figure is dependent on your financial records.
- The costs and expenses incurred by your business despite the fact that the location is unusable.
- Costs associated with moving your business to a temporary location.
- “Extra expenses” that may be incurred by keeping the location open such as equipment rental.
How long, following the disaster, does it take for Business Interruption insurance to kick in?
Usually requires 72 hours before activating.
How long am I covered while I re-build my business?
Generally BII Coverage is available only during a period of time that it would take to
get the business up and running. During this time you will be required to prove all business interruption losses to your insurer.
Are there exceptions to what might be covered?
Yes. Business interruption coverage is not a blank check for every business disruption. Coverage is restricted to specific situations that include suspension of operations and unfavorable Business Conditions. You should speak to your Agent for more details on what situations this may include.
If you need to file a claim?
If you do find yourself in a situation where you will be filing a claim against your Business Interruption insurance, you must provide some preliminary and specific details to your claims adjuster. This information would be a good idea to have prepared in advance as a part of your disaster recovery plan, so that it is ready to turn over to your adjuster when you need it. The last thing you will want to be doing after disaster strikes is trying to provide details and gather paperwork about things such as:
- Background details about the business and its products and services
- Financial statements for at least three years prior to the incident
- Financial projections
- Monthly sales and production summaries
- Inventory details
- An estimate of the loss
REMEMBER: Just as you should review your standard insurance policy every year, so too should you review your Business Interruption Insurance.
Factors to consider when re-evaluating your business interruption coverage:
- Is the market for the business’ services expanding or shrinking?
- Has the business launched new products or services?
- Are competitors entering or leaving the market?
- Has the business’ peak season changed?
- Have building codes changed in the business’s location?
- What is happening to the business’s costs?
For more information about Business Interruption Insurance, call your agent.