Getting business interruption insurance is a smart decision to cover events like fire and wind damage to your business premises. Events like these, and many others, do happen and you want to be prepared in case they do.
In a FEMA report, the agency reported that 40% to 60% of small businesses don’t reopen due to a disaster. Also, 90% of small companies fail within a year if they can’t resume operations within five days.
In all likelihood, you may have never heard about this type of insurance. In this post, you’ll find out what’s covered and what’s not, whether you need the insurance, the types of business interruption insurance available, and how much you should expect to pay.
What is business interruption insurance?
If you’re affected by a natural disaster, business interruption insurance covers loss of income caused due to damages.
For example, if the damages sustained to your building mean you can’t open your doors for business or that your employees can’t enter to work, the normal income you receive each day and depend on no longer exists.
Business interruption insurance policies provide revenue until repairs are made to the damaged property or per specifications outlined in the policy. In most cases, there’s a 72-hour waiting period before benefits start.
What does business interruption insurance cover?
For the most part, business interruption insurance provides for these basic coverages. However, what’s covered varies per policy and insurance company:
1. Operating Expenses
Fixed costs that you continue to pay are normally covered, such as employees’ wages, taxes, rent, and loan payments.
Insurance companies will use historical data to determine amounts you routinely pay for these expenses.
2. Normal Profits
Based on your financial statements, the revenue you normally earn is covered. It’s up to you to keep good records to prove financial loss. Before you ever get a policy, make sure to keep the type of records an insurance company will require.
3. Temporary Housing
If you operate your business at a temporary location, moving and ongoing expenses to run your business are normally covered.
4. Extra Expenses
In addition to fixed costs, you may incur other reasonable expenses that business interruption insurance will cover. If the business interruption insurance policy doesn’t cover extra expenses, some insurance companies offer a separate extra expense insurance policy.
What doesn’t business interruption insurance cover?
On the other hand, there are some things these policies don’t cover. Things such as:
1. The income you can’t document
You need to be able to prove that you earned an X amount of income. Insurance companies need to verify, at a minimum, the last 3 months of earned income.
2. Utility expenses
When your business shuts down due to a disaster, power lines are usually down. In most instances, you won’t have access to electricity, gas, water, heating oil, telephone landlines, trash removal, and possibly internet services. Depending on your policy, business interruption insurance may provide benefits if your business doesn’t have electricity beyond 72 hours.
3. Non-covered damages
Most policies don’t cover flood, hurricane, and earthquake damages. However, some providers may cover tornadoes, hurricanes, mudslides, hail storms, and vandalism.
4. Damages that don’t close your business
A broken window or damage to your building’s roof that doesn’t cause your business to close would not be covered by business interruption insurance.
Types of business interruption insurance
If you think you should get this insurance, make sure you understand the different types:
- Business interruption: This is a basic policy to compensate businesses for loss of income until repairs are made.
- Extended coverage: The insurance covers the gap between when repairs are completed and when a company starts earning income. The policy will specify a time limit between these two events.
- Contingent coverage: Business earnings can be severely interrupted when a supplier a business depends on sustains major damage or customers are unable to reach a business due to road damage. In situations like these, insurance providers work closely with businesses to assess their unique risk factors.
Who needs business interruption insurance?
Business owners should be aware that property insurance won’t compensate you for business loss of income. Your assets like machinery, vehicles, etc. are covered by property insurance but income generated by foot traffic to your business or selling wholesale products to suppliers is not. Retail stores, hair salons, and restaurants are examples of businesses that normally purchase business interruption insurance.
Therefore, without business interruption insurance, an abrupt halt in income could cause your business to shut down permanently.
Reasons to get this insurance:
- a business located in an area that’s prone to disasters
- having a small profit margin
- depending on physical assets to run your business
How much does business interruption insurance cost?
This type of policy is normally sold as an addendum to a business owner’s policy which includes general liability and property insurances. Insurance companies sell standalone policies when your business has unusual risks.
Most business interruption insurance policies cost between $500 – $1,500 per year.
Just remember that each insurance provider offers different pricing based on your type of business, its size, and the expected coverage amount you need to cover current operating expenses and revenues.
Camino Financial understands your challenges
Business owners face all kinds of disasters from wind damage to a building or struggling to have enough working capital to cover expenses. To help you meet these difficulties head-on, Camino Financial offers resources to educate members on business management and other aspects of running a business.
At Camino Financial, we provide exceptional services because our motto, “No Business Left Behind”, inspires everything we do.