When purchasing business insurance, many business owners elect to purchase multiple types of insurance coverage in a bundle known as a Business Owner Policy (BOP). These bundles can include property, flood, crime, liability, and business interruption insurance, and business owners can pick and choose the types of coverage that are most applicable and affordable for their circumstances.
While it’s important to balance the cost and coverage of your business insurance policies, it’s also equally important to protect not only your property – but also your profits – in the event of a disaster. To do so, make sure to purchase business interruption insurance for your company.
While business interruption insurance can cost anywhere from $750 to over $10,000, depending on the size of your business and extent of coverage you elect, don’t mistakenly think this type of coverage is unnecessary and forego it to save money. The number of natural disasters continues to increase and, with it, the likelihood that your business may experience a fire, flood, or other event forcing it to suspend operations does as well.
What is business interruption insurance?
Business interruption insurance is a specific type of insurance that helps ensure your ongoing income if your company is forced to stop operations after a natural disaster or other catastrophe, such as a fire or flood. The financial protections provided by business interruption insurance are particularly important because they help cover costs associated with relocating your business, paying your employees’ salaries, and/or paying rent while your business is closed due to property damage after a disaster.
Three types of business interruption insurance:
Your business interruption insurance policy will specify whether your company must be either partially or entirely shut down for you to be eligible to claim compensation for lost income. In addition to the different levels of coverage, there are also three specific types of business interruption insurance that you can choose from:
- General business interruption insurance protects you from losing income while your company is closed in order to replace or repair your property.
- Extended business interruption insurance provides additional protection once your company reopens. It compensates you for the income that is lost while your company returns to its pre-loss revenue level.
- Contingent business interruption insurance protects your company from lost income that results from damage to neighboring properties or your suppliers.
Whether you’re a new business owner curious about business interruption insurance or you’ve already submitted a claim against your policy, keep reading to learn about what is covered by business interruption insurance and how to successfully receive compensation for lost income after a disaster.
1) Specific criteria are required for your business interruption insurance policy to go into effect:
- The damage must have occurred to the property identified in the policy. If your policy doesn’t include contingent business interruption coverage, you cannot claim compensation for lost income due to damage to a neighboring property.
- The damage or disaster that occurred must be identified in the policy. For instance, most business interruption insurance policies have separate policies for floods.
- Business operations must be forced to stop as a result of the property damage. Some policies will cover lost income due to partial interruptions to your business, though most require the damage to cause a complete suspension of business operations.
- The lost income must be directly related to the property damage. You can’t claim compensation for lost income that is unrelated to the property damage that occurred.
2) Business interruption insurance will only cover the “actual loss of business income”. Business interruption insurance is only intended to repay the net income that your company would have normally earned if it wasn’t forced to suspend its operations. In other words, don’t expect to make more money than you ordinarily would have.
3) Business interruption insurance only covers lost income during your business’ “restoration period”. Under most business interruption policies, the restoration period is the amount of time business operations must be suspended in order to repair the damage to your property. Restoration periods typically begin when the damage occurs and ends when the damage is fixed, assuming the repairs and/or replacements were completed at a reasonable speed. As a business owner, you are only eligible to receive compensation for income lost during this time.
- The amount of time needed to repair or replace damaged property varies greatly and may be affected by factors outside of the business owner’s control. As a result, the length of the restoration period – and the total amount of income that is lost during this time – is one of the more common disputes between business owners and their insurance companies when negotiating a claim.
4) The burden is on the business owner. As a business owner, the burden of proof rests on your shoulders when you submit a claim under your business interruption policy. In addition to proving that you are entitled to your claim in the first place, you must also calculate the cost of your claim.
5) You have the right to your own accountant. Calculating the income that your business lost while it was closed to due property damage can be complicated. While you can rely on your insurance company’s adjustor, you also have every right to hire you own accountant to help calculate the cost of your claim. This is especially important if your lost income is substantial since a lawyer or accountant specialized in business interruption can help ensure your claim is processed according to law.
5) Your evidence must be “objective, verifiable, and evidentiary”. When you submit your claim under a business interruption insurance policy, you must provide extensive evidence that proves that you lost income and supports the calculations behind your claim. It’s important to use all of the “objective, verifiable, and evidentiary” information at your disposal. This includes, but isn’t limited to: financial statements, tax returns, customer orders, receipts, annual reports, and even market forecasts or reports from external sources.
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