What Is Business Interruption Insurance?
Business interruption insurance is insurance coverage that replaces business income lost in a disaster. The event could be, for example, a fire or a natural disaster. Business interruption insurance is not sold as a separate policy but is either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider.
Business interruption insurance is insurance coverage that replaces income lost in the event that business is halted due to direct physical loss or damage, such as might be caused by a fire or a natural disaster.
This type of insurance also covers operating expenses, a move to a temporary location if necessary, payroll, taxes, and loan payments.
In rare cases, business interruption insurance can apply if a civil authority shuts down a business due to physical damage to a nearby business, resulting in a loss for a firm.
Standard business interruption insurance does not reimburse policy holders if the business is closed due to a pandemic. Even some all-risk insurance plans have specific exclusions for losses due to viruses or bacteria.
Understanding Business Interruption Insurance
Business interruption insurance premiums (or at least the additional cost of the rider) are tax-deductible as ordinary business expenses. This type of policy pays out only if the cause of the business income loss is covered in the underlying property/casualty policy. The amount payable is usually based on the past financial records of the business.
Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy. According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days.1 Most business interruption insurance policies define this period as the date that the covered peril began until the date that the damaged property is physically repaired and returned to the same condition that existed prior to the disaster. There may also be a waiting period of 48 to 72 hours.
What Business Interruption Insurance Covers
Most business interruption insurance covers the following items:
Profits: Based on prior months' performance, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
Fixed costs: These can include operating expenses and other incurred costs of doing business.
Temporary location: Some policies cover the costs involved with moving to and operating from a temporary business location.
Commission and training cost: In the wake of a business interruption event, a company will often need to replace machinery and retrain personnel on how to use the new machinery. Business interruption insurance may cover these costs.
Extra expenses: Business interruption insurance will provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the business gets back on solid footing.
Civil authority ingress/egress: A business interruption event may result in government-mandated closure of business premises that directly cause financial loss. Examples include forced closures because of government-issued curfews or street closures related to a covered event.
Employee wages: Coverage of wages is essential if a business does not want to lose employees while shutting down. This coverage can help a business owner make payroll when they cannot operate.
Taxes: Businesses are still required to pay taxes, even when disaster hits. Tax coverage will ensure a business can pay taxes on time and avoid penalties.
Loan payments: Loan payments are often due monthly. Business Interruption coverage can help a business make those payments even when they are not generating income.
Business interruption insurance is not sold as a separate policy but is an add-on to an existing insurance policy.
What Business Interruption Insurance Does Not Cover
According to the Insurance Information Institute website, you will not be covered for:
- Broken items resulting from a covered event or loss (such as glass)
- Flood or earthquake damage, which are covered by a separate policy
- Undocumented income that’s not listed on your business’ financial records
- Utilities
- Pandemics, viruses, or communicable diseases (such as COVID-19)
Special Considerations for Business Interruption Insurance
Note that the insurer is only obligated to pay if the insured actually sustained a loss as a result of the interruption. The amount that will be recouped by the business will not exceed the limit stated in the policy.
Business Interruption Insurance and Pandemics
Not surprisingly, what business interruption insurance does and does not cover has come under particular scrutiny during the COVID-19 outbreak and the business shutdowns and curtailments that resulted. The answer, unfortunately, is that for the most part policy holders will not be covered.
"The standard business interruption policy only applies when the business sustains direct physical loss or damage, such as a fire," says James Lynch, FCAS MAAA, chief actuary and senior vice president of research and education of the Insurance Information Institute. "Business interruption can also apply when a nearby business sustains direct physical loss or damage and a civil authority like the government closes all businesses as a result."
Viruses don't actually break anything. As Michael Menapace, a partner at Wiggin and Dana and professor of insurance law at Quinnipiac University School of Law, told Jeff Dunsavage of the Insurance Information Institute: "The virus...[compared to a fire or broken windows from wind damage], leaves no visible imprint. Left alone, it can’t survive long and, after it has perished, whatever it was attached to is as good as before."
Even all-risk business interruption insurance has exclusions. And, especially since the SARS outbreak of 2003, those exclusions have tended to include losses from viruses and communicable diseases, Dunsavage notes.
