What is Business Interruption Insurance?
Most business owners know they need to protect their business with different types of business insurance, such as property insurance to repair or replace buildings and equipment, or auto insurance in case of an accident. However, few business owners think about how they would keep the business going if they were forced to close temporarily.
Business interruption insurance is an important part of continuity planning. The goal is to help companies get through an unexpected and temporary closure of their business, often due to a natural disaster or other emergency.
What is business interruption insurance?
Business interruption insurance covers lost income while your business is temporarily closed. It also covers any additional expenses you may incur while relocating or restoring your business operations. This coverage can be critical in helping your business recover from a setback.
For example, what would happen if a car crashed into your retail shop or a pipe burst, flooding your office building? If you needed to close for a week or more for repairs, would you be able to keep the business afloat, pay employees, and cover your rent or mortgage payments?
Business interruption insurance1 can help you cover costs including:
- The net profit you miss out on while the business is closed
- Mortgage or rent payments for your business location
- Loan payments that you need to make to your bank while the business is closed
- Real estate, property, and payroll taxes
- Employee wages and salaries
- Relocation costs and rent expenses if you move into a temporary location
While the actual coverage varies from carrier to carrier, most business interruption policies cover perils such as theft, fire, wind, falling objects, or lightning.2 Most policies don't cover interruptions due to floods or earthquakes, so if your business is located in an area prone to those types of disasters, you may need to look into purchasing a rider to add those perils to your policy or purchase a separate policy for that coverage.
Note: Many insurance companies were also quick to alert their customers that most business interruption insurance policies specifically exclude closures due to pandemics3 like COVID-19.
While covered perils vary from company to company, most business interruption policies cover theft, fire, wind, falling objects, or lightning.
How much business interruption coverage do you need?
Business interruption policies typically have a coverage limit, which is the maximum amount the insurance company will pay toward a covered claim. For that reason, it's important to make sure you get a policy with coverage limits that are right for your business.
Every business's circumstances are unique, so to estimate the amount of coverage you need:4
1. Estimate how long it would take to restore operations. A small retail store or office might be able to move to a new location quickly. A company with dozens of employees who depend on highly specialized equipment could take much longer to make the necessary repairs or find another suitable location.
2. Calculate business revenues for that period. This includes all products and services you sell.
3. Deduct the cost of goods sold and other operating expenses. The result is your potential lost profit.
4. Add the cost of moving or renting another location. This may include leasing new space and equipment, updating the new location to fit your operations, and more.
Your insurance agent can also help you with these calculations and selecting the right coverage limits.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- Insurance Information Institute, “Do I Need Business Interruption Insurance?" accessed January 27, 2021. Back
- Allstate, “What Is Business Interruption Insurance?" Updated November 2019, accessed January 27, 2021. Back
- JD Supra, “COVID-19 Business Interruption Suits: And Overview of Decisions to Date," Published December 18, 2020, accessed January 27, 2021. Back
- Hartford, “Calculate Business Income," accessed January 27, 2021. Back
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