Business Interruption Insurance
Owning and running any kind of business is a challenge right out of the gate. When you consider how many things can go wrong, it makes you wonder if it’s even worth it.
The best way to overcome these uncomfortable feelings is to transfer your everyday financial risks to a highly rated insurance company. You can accomplish this by finding an independent insurance broker who is experienced and reputable.
Most business owners consider the risks that must be dealt with while the business is open, but what about if your business cannot open because of a natural disaster, forced government shutdown, or you or your customers cannot enter the business because a government agency is preventing access?
This is when business interruption insurance is crucial for keeping your business afloat.
What is Business Interruption Insurance?
Business interruption insurance is the coverage in your Business Owner’s Policy (BOP) that is triggered when you cannot physically open your business because of a covered peril. A BOP is a package policy typically consisting of commercial property coverage, general liability, and business interruption insurance.
When this happens, your insurance company will help pay business expenses when your revenue is interrupted. In fact, it will actually replace your documented revenue to help you get through the crisis of being closed.
Typical expenses that you will need help with are:
- Your mortgage or lease payment for space your business occupies
- Federal or state taxes
- Funds to keep employees on your payroll
- Relocation costs if you are forced to temporarily relocate your business while your building or space is under repair or being blocked by a government agency
- Revenue that you would ordinarily take in if your business was open
- Business loans or credit line payments that will have to be paid to operate your business
How much business interruption insurance should I buy?
The amount of business interruption insurance you buy will affect the final premium of your business owner’s policy so it makes sense to determine a limit of coverage that is affordable
If your business has been open only for a short time it may be difficult to calculate your needs so be sure and use an agent who has other customers that have been operating a business similar to yours and will have access to the data needed to make an informed decision regarding the limits required.
WARNING: If the limit you purchase is not sufficient to cover your losses, you will have to make up the difference out of pocket to avoid closing your business.
Many Business Owner’s Policies list this coverage as “business interruption and extra expense coverage, so what does extra expense cover?
Extra Expense Coverage
The extra expense coverage provided in your business owner’s policy is designed to cover expenses beyond your normal operating expense that are required to keep your business from going under. Typical examples of extra expenses are:
- The costs of renting a temporary location while your original place is under repair
- The cost to replace business personal property like furniture, technology, and equipment
- The cost of potential overtime for employees or having to hire additional employees
- The cost to lease equipment that is no longer available to the business
Other Costs that can be covered in the Business Owner’s Policy
Sometimes a business is closed as a result of a civil authority prohibiting access to your premises due to physical damage to an adjacent property.
For example, if you own a shop or warehouse space in a group of buildings, your building could be closed if a fire burned down a building close by.
In these types of cases, your insurance policy would cover the additional expenses you would incur (typically a two week period) because an adjacent business suffered damage from a covered peril that caused your business to be closed temporarily as well.
You will also have the option to extend your business interruption coverage by adding an endorsement that will cover costs resulting from the loss of utility services such as electrical, gas, or water that is provided by either a public or private entity.
Typically you will have the choice of two types of Utility endorsements:
- Time Element Endorsement – This endorsement covers in situations when a water main fails or a power line that services your premises is down. Typically losses are covered until the utility service is brought back online.
- Direct Damage Endorsement – This endorsement extends your property insurance and provides financial protection if there is an interruption of any utility services as that typically results from a natural disaster such as a tornado or hurricane.
The Bottom Line
Although business interruption insurance can help you survive a disaster that forces your business to cease operations, there are exceptions and limitations that you should become aware of. Make sure you speak with your independent commercial insurance broker to determine which coverage or endorsement is the most appropriate for your business.
And while you’re at it, think about the additional coverages you need to protect your business from property and liability losses. Fairbanks Insurance Brokers may very well be your number one resource for protecting what’s yours.
Here is What We Recommend
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.