Business interruption insurance: what, why, and how?

Business interruption insurance (also known as business income insurance, or BI insurance), protects you and your business against any costs incurred if you need to cease operations for a period of time.

For example, if you had a fire at your office, your fire insurance policy would cover the costs of replacing the building and its contents. But it would not cover your payroll, operating costs, equipment leases and other financial obligations while you get back on your feet.

That’s where business interruption insurance comes in.

Here are a few tips to help you better understand why you need it, how to get it, and how to use it (even though we hope you never need to):

Why should I get it?

1. Some areas are more prone to business interruptions because of weather (snowstorms, hurricanes, floods, etc…), but the risks of an interruption run the gamut. Here are the top 10 global causes of business interruption insurance claims, ranked by total value of loss (Source: Allianz Global Corporate & Specialty):
   • Fire and explosion
   • Storms
   • Machinery breakdown
   • Faulty design/material/manufacturing
   • Strikes, riots and/or vandalism
   • Cast loss (entertainment)
   • Floods
   • Collapse
   • Human error/operating error
   • Power interruption
2. According to data from the Small Business Administration, 60% of small businesses never open their doors again after they’re affected by a major disaster. 
3. Business interruption isn’t always because of events on your property. For example, a chemical spill downwind can result in an evacuation order that causes significant business interruption. The same is true of a sewer, power, or gas problem off of your property.
4. A shutdown could result in liability towards the property owner, developer, or even your tenants. You may even find yourself at the wrong end of a lawsuit from your community association. A lawyer can help you decide which coverage will protect you from this.
5. The old saying about doubling the coverage you think you need holds true: According to reporting from Insurance Journal, citing a survey from the Chartered Institute of Loss Adjusters, 40% of declarations were deemed too low by about 45%.

How does it work?

1. Business interruption now represents a majority of covered losses on typical claims. That is, your losses due to business interruption may well be greater than your direct property damage from the event that caused the interruption in the first place. 
2. Business owners generally get most of their business interruption protection as part of their commercial property insurance, business owners’ policies (BOPs) or Commercial Package Policies (CPPs). 
3. Generally, interruption coverage is not sold as a stand-alone insurance policy. Instead, it’s added as an endorsement to property insurance, or otherwise included in a package. You should assess the business interruption-related protections in several different policies, including your general property insurance and separate flood, fire, cyber risk, windstorm and other policies you have in place. 
4. ‘Contingent business interruption,’ or CBI, covers your business if an interruption at a vendor or contract results in a loss of income for your business.
5. ‘Leader property coverage,’ is a great idea for businesses that rely on other businesses to continue generating business for them. For example, if you own short-term rentals near Disney World, and there’s a hurricane that severely damages the park (but you’re unaffected), you could suffer catastrophic losses while they’re closed. 
6. Don’t forget about ‘extra expense’ coverage. Speak with your insurance broker about ‘extra expense’ insurance to help your company function during and after a disaster. For example, if you run a multifamily building, you may require additional man-hours to serve your residents and get your property functioning again after a disaster. But, depending on the disaster, you may not have a leasing office anymore. It will take cash to function as usual, including the cost of operating from a temporary location, renting vehicles to replace those lost in a flood or other disaster, renting generators, etc…
7. Business interruption coverage is only triggered if the precipitating event is a covered risk under the base policy. If you’re in California, for example, your basic property coverage may provide for business interruption coverage in the case of a structural defect in the building forcing you to close your doors for two weeks while you get it fixed. But if it’s caused by an earthquake, you’re likely out of luck (Californians usually have to buy separate earthquake insurance). The same could be true of windstorms (covered under your hurricane/wind insurance policy) and terrorism attacks (covered under terrorism risk insurance).  

What should I expect if I need to use it?

1. Anticipate retaining responsibility for your own costs for at least 48 hours. That’s the usual minimum exclusionary period before business interruption insurance kicks in to pay the promised benefit. 
2. Remember that you have an obligation to mitigate ‘extra expenses’ as much as reasonably possible. 
3. Don’t rely on your business interruption insurance policy doing all the work for you. You should also have a detailed business continuity plan in place, and ensure it’s updated frequently. 
4. Don’t count on regular business interruption insurance to cover a halt in operations due to a cyber risk. You’ll probably need separate cyber risk insurance to cover that.