Business interruption insurance protects a business from the financial effects of closing down or significantly reducing operations due to various unfortunate scenarios. It can help cover lost profits, fixed costs, and other expenses incurred due to the interruption. As a business owner, you have a lot to manage as is without the added complexities of buying insurance. This blog will guide you through business interruption coverage in a clear, jargon-free, and concise way. We’ll explore the various types of business interruption insurance, how it works, and the importance of having it in place to protect your business. This features as part of our wide-ranging series on business insurance.
What is business interruption insurance?
Business interruption insurance is a type of business insurance coverage that helps a business financially recover from a loss of income due to unexpected events such as natural disasters, fires, or other unforeseen circumstances.
Business interruption insurance is sometimes also known as business income insurance or income coverage insurance.
It is primarily bundled with a commercial property insurance policy rather than offered as a standalone policy.
Do I need business interruption insurance coverage?
While business interruption insurance isn’t mandatory or required by law, the majority of small businesses could benefit from having this kind of coverage.
If your business stopped generating income for some time, you can imagine how your debt would increase with fixed costs like rent, salaries, etc., that you still need to pay. Business interruption coverage can keep you afloat in specific challenging scenarios.
In particular, if your business is dependent on a specific location being opened or a piece of equipment operating, this insurance could be a good idea for you.
How much does business interruption insurance cost?
Business interruption insurance generally costs between $100 – several thousand dollars per year. As is the case with other types of business insurance, particularly commercial property insurance, your insurance company will calculate your premium on the following factors:
- Your Industry – Is your work inherently risky compared to other industries? If so, you can expect your premium to reflect this. For example, if you operate a restaurant or cafe, you might be more likely to have a fire that would impact your revenue.
- Your Location – If your business operates in an area with a higher risk of theft or perhaps in an area more prone to wildfires. Your premium will cost more than if this wasn’t the case.
- Your level of experience – You know your business inside and out! Unfortunately, insurance companies look at your years of experience as a measure for this. If you’re newer to your industry, it can increase your premiums.
- Annual revenue – If your business has a high annual revenue, your business interruption coverage would potentially have to cover more significant operating expenses and lost income in the event of a claim.
- Any previous insurance claims – Insurance companies look to your business’s past claims to calculate how likely it is to happen again. For example, repeated theft or third-party bodily damage.
- The number of employees – This one goes without saying, the more folks working in your business, the higher the likelihood of a slip-up or mistake. Additionally, the more employees you have, the bigger your payroll is, which would mean a larger payout for any covered loss.
What does business interruption insurance cover?
Business interruption insurance covers operating expenses, such as employee wages, rent, and loan payments. It can also cover your net profit, basically your entire business income.
In terms of the scenarios your policy pays out for, you should always get a clear understanding of this from your insurance company, so you know what a covered peril is and what isn’t. That said, it generally covers lost business income in the event of physical damage or loss to your business.
For example, if your store were vandalized and needed to close to repair damaged property, your policy would cover your rent and any fixed costs, such as bills or employee salaries during the restoration period.
Sometimes, your business premises might require extensive and longer-term repairs, for example, if there is a large fire and you suffer significant physical loss or damage. In these scenarios, it’s not uncommon for a policy to pay for the cost of a new or temporary location which could help you generate income in the short term and reduce the insured loss.
What does business interruption insurance not cover?
Generally speaking, business interruption coverage doesn’t cover losses from non-physical damage. For example, if you’re facing a formidable new competitor in your market, there’s no cover for losses from this.
If you face any issues with key suppliers, a typical business interruption policy won’t cover this. However, you can get a separate additional policy called contingent business interruption insurance to turn this into a covered event.
For example, if your supplier’s roof collapses and they cannot provide you with key materials, a contingent business interruption policy can protect you from any financial loss.
Communicable diseases are also not covered by standard business interruption policies. This includes Covid-19 or any other similar government-required shutdowns. Since the pandemic, these are often explicitly excluded.
What is business interruption sum insured?
In a nutshell, this is the amount you calculate your business would need to cover if your company had to stop business operations.
How do I calculate business interruption sum insured?
First, talk to your licensed insurance broker. They can help guide you through this process. In addition, you may want to speak to your accountant to understand your current and projected business situation and future profits.
You need to consider the worst-case scenario for your business. Considering much revenue, you would need to cover your operating costs and business expenses during this time, considering any potential moving costs and extra expenses in the event you need temporary premises.
What are the two main types of business interruption insurance?
The two most common types of business interruption coverage are limited or extended.
- Limited Indemnity – This covers you just for the period your business is closed and doesn’t account for any time after opening that it takes to get to your original level of revenue.
- Extended Indemnity – This covers your business beyond re-opening, up to the point your business gets back to its original pre-interruption level. This generally has a maximum amount.
If disaster strikes, many small business owners wouldn’t be able to keep their doors open and businesses running for an extended period without revenue. In particular, those that are dependent on key resources to operate. In these situations, a business interruption policy can act as a cost-effective safety net, helping you to get back on your feet.
Is business interruption insurance taxable in Canada?
The premiums are tax deductible. However, if you make a claim, any proceeds or claim amounts from the policy are taxable, just like any other form of income.
Does business interruption insurance cover pandemics?
No, pandemics are excluded from these kinds of policies.