Business Interruption Insurance (also known as Business Income Insurance) is a type of insurance that covers the loss of income that a business or practice suffers following a covered loss. The income loss covered by the Business Interruption Policy may be due to the closing of the business or to the rebuilding process after a covered loss. The aim of the Business Interruption Policy is to put the business back in the same financial position it was in prior to the loss. Business Interruption insurance is normally added to the Business Office Policy.
What About Coverage Under My Property Insurance?
The property portion of a Business Owner’s Policy does not cover income lost because of a covered loss. Without Business Interruption coverage, a business or practice may not be able to recoup lost profits even though it has insurance to repair or replace physical assets. Any business or practice that generates income needs Business Income Insurance.
What is Defined as a “Covered Loss”?
The definition of covered loss for business income insurance is the same as those losses covered by the property policy—fire, smoke, theft, wind, vandalism, etc.
How Does Business Interruption Insurance Work?
After a covered loss, like a fire, the insurance carrier will ask for information documenting the lost profit. There are going to be some estimates involved, because the profit being documented is anticipated profit—profit the business would have earned based on past months’ financials. The profit being claimed is the profit that would have come during the time that the business or practice is closed due to the covered loss. Clearly the better the record-keeping, and the more stable the business revenues, the better the estimate of lost earnings.
What is Meant by “Loss” Under the Business Interruption Policy?
Business Interruption Insurance is frequently misunderstood. It is designed to cover what the business loses in the covered event, not the total revenue of the business or practice. In adjusting a Business Interruption claim, the insurance company will deduct expenses that are not incurred during the time the business is closed, expenses such as utilities, income taxes, and janitorial. A good way to look at what is covered: the insurance doesn’t consider what your business put in your pocket, but rather what the covered loss took out of your pocket.
What Expenses Will Be Paid under the Business Interruption Policy?
What comes out of the business owner’s pocket during the rebuilding period following a covered loss is net profits plus any continuing expenses, based on historical costs. Insurance, advertising, payroll (negotiable) and other types of overhead expenses will continue to be paid, although these expenses may be reduced because the business is closed.
What Happens if the Business Has to Relocate During the Restoration Process?
Some policies cover the extra expenses for moving to, and operating from, a temporary location. The Business Interruption policy also covers the cost of providing training following an insured event. Extra Expenses are covered, that is, expenses beyond fixed costs that allow the business or practice to continue to operate while the damage is being repaired.
Are Expenses Mandated by a Civil Authority Covered?
Yes. Expenses related to Civil Authority are covered. Examples of this are when the government requires the closing of a business that reduces revenue, such as a forced closure because of a government-mandated curfew or street closure related to a covered event.
When does Business Interruption Coverage Begin?
BI claims are triggered by damages greater than the dollar deductible on the policy. Alternately, coverage is triggered by business shutdown time that lasts longer than the “waiting period” shown on the policy, typically anywhere from 24 hours to 72 hours. Some waiting periods are based on business hours and some are based on actual hours.
How Long Does the Business Interruption Coverage Extend?
Business Interruption coverage goes on until the end of the period noted on the policy. Most companies define this period as beginning on the date damage is incurred and continuing until the damaged property is or should have been repaired or replaced. Coverage can be purchased for an extended period of indemnity or restoration—allowing a business to claim income while continuing to gear up to the level it was prior to the loss. Also available is Contingent Business Interruption Insurance, which pays if a business is affected because of damage to the premises of one of its suppliers, like a power outage at a suppliers’ plant, thereby preventing it from normal operations.
John Gracey Backer, CPA
John Gracey Backer, CPA, is the Treasurer of Gracey-Backer, Inc., an Insurance Agency in Delray Beach, Florida specializing in All Lines of Malpractice, Professional and Personal Insurance for the Healthcare Provider. He can be contacted at 800-272-6055 ext 128, or at firstname.lastname@example.org.