How Does Business Interruption Insurance Work?

BUSINESS INSURANCE


Feb 16, 2021

An Introduction to Business Interruption Insurance

How would you react if you had to shut down your business tomorrow, with no real clue as to when you might be able to get back up and running? It is a daunting prospect because you and your staff rely on your business operating as usual to sustain your lives. However, things such as the weather or the unpredictable nature of human behaviour can strike at any time, without warning. Business Interruption Insurance can help cover expenses and finances while your business is temporarily closed and scaled back. We can assist you in breaking down some of the basic questions you may have about Business Interruption Insurance by examining what is Business Interruption Insurance, why you may need Business Interruption Insurance, what coverages are included in Business Interruption Insurance, how much Business Interruption Insurance costs and more.

What is Business Interruption Insurance?

At its core, Business Interruption Insurance covers the lost income and operating expenses when things like fire, theft, flood and vandalism force a business to scale back operations or close its doors temporarily. It can be added on to a commercial property policy if not already included in your business package cover. You cannot buy Business Interruption Insurance completely on its own or tack it onto a homeowners’, renters or condo policy.

Do You Need Business Interruption Insurance?

Business Interruption Insurance - also referred to as Business Income coverage or Income Replacement cover - replaces lost income and pays for operating expenses when certain events beyond your control force your business to slow operations or shut down. Having access to Business Interruption Insurance can be vital to a business’ survival in times of concrete hardship – but not all business owners know about it.

Many forego Business Interruption Insurance, assuming that their standard Commercial Property Insurance or General Liability policy will suffice. Commercial Property Insurance will repair or replace property that is damaged or stolen. However, it won’t cover lost income or future expenses—which are essential to sustain your operations after a catastrophe.

If your business operates in a brick-and-mortar setting, you’re most in need of Business Interruption Insurance because you heavily depend on your store and the physical assets inside it. If you need to close a portion or all of your shop, you lose potential customers. Home-based and online business owners have less of a need for Business Interruption Insurance, however, you should still consider your situation as there may be contingent ramifications for your business if your supply chain is affected by one of the disasters previously mentioned.

What Does Business Interruption Insurance Cover?

Business Interruption Insurance is both backward and forward-looking in terms of coverage. It covers income that you have already lost from a disaster, but also future expenses, including:

  • Lost income/profits,

  • Payroll,

  • Business loan instalments,

  • Taxes,

  • Relocation costs,

  • Lease or mortgage payments,

  • Fires,

  • Storms,

  • Riots,

  • Vandalism

  • And theft.

What is NOT Covered by Business Interruption Insurance?

Business Interruption Insurance usually does not cover:

  • Utilities,

  • Floods and earthquakes,

  • Direct property damage,

  • Employee injuries,

  • Liability,

  • Voluntary closures

  • Or seasonal slumps.

In some cases, your business might be harmed indirectly by property damage down the supply chain.

For example, say you have a retail craft beer shop in rural Nova Scotia selling niche ales, which imports beers from a wholesale supplier in Hamilton, Ontario. A fire at the brewing facility in Hamilton forces the supplier to halt operations for several weeks, disrupting your supply of beer, leading to a sales dip. If you have appropriate coverage in your Business Interruption Insurance policy, you could claim benefits for that lost income.

What is the Cost of Business Interruption Insurance?

Well, it depends on:

  • The amount of coverage and policy deductible,

  • The location and size of your business,

  • The type of business you are running (assets to be replaced, etc,)

  • Your business’ claims history

  • And safety measures that you have taken to protect your business premises.

How Much Business Interruption Coverage Do You Need?

To calculate how much business interruption coverage to buy, you first need to figure out how much you stand to lose in a worst-case scenario - if a disaster hits your business and leaves it completely unable to function.

How to Establish the Right Business Interruption Insurance Limit That You’ll Need:

Calculate your business’s projected income. Estimate your business’s annual income for the coming year and divide your estimate by 12 to get projected monthly income.

Work out how long it would take to get your business running again. For example, if your business were destroyed, you’d have to call an insurance adjuster and an appraiser to appraise the losses, an architect to design a new building and a contractor to construct a new building. You also might have to relocate while you wait to move in. This is known as the period of restoration which could last several months, depending on the size of your business.

Understanding the Amount of Lost Income and Operating Expenses During That Time.

You know your monthly income - add up how much income you would lose during the period of restoration. Note your monthly expenses for that period.

The money you will receive from the insurance company for each claim is based on records of your business income and expenses, dictating the paramount importance of a robust business accounting system.

The utility of your Business Interruption Insurance is only as reliable as the accuracy of your business accounts – having a strong bookkeeping team is critical to the successful pursuit of such a claim.

Learn more about how to determine your business insurance liability amounts.

It is critical to take the time in advance to make sure you and your business are prepared for the unexpected. At Foxquilt, we know the value of finding the right insurance solution. It is impossible to put a price on the confidence that comes with knowing that you and your business are prepared for whatever storm the world may throw at you. Having Business Interruption Insurance can provide you with just that - the feeling of security that comes with knowing that you have a safety net in place to help protect from the losses your business may face if a catastrophe strikes. Our Foxquilt insurance experts can assist you in finding the right insurance solution for your business, every step of the way. Get started on your online quote today.

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