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Are You Covered in Case of a Business Interruption?

If a fire causes your pawnshop to be temporarily unusable, what would you do next? Ideally, you would move to a temporary location while your permanent place of business is being repaired. Yet, traditional Property Insurance does not cover this move or a loss of income when a business must temporarily close. With Business Interruption Insurance, also referred to as Business Income coverage, this setback can be minimized by simply adding this coverage to your Property Insurance policy. 

Many business owners fail to consider how they would manage if a fire or natural disaster rendered their business premises temporarily unusable. According to the Federal Emergency Management Agency (FEMA), almost 40 percent of all businesses that close down following a disaster never open again.

With advanced planning, there are measures you can take to protect your company’s bottom line. 

What is included in a Business Interruption Insurance Policy?

  • Compensation for lost income if  has to vacate its premises as a result of disaster-related damage covered under a Property Insurance policy.
  • Covers the profits that would have been earned based on previous financial records, had the disaster not occurred.
  • Covers operating expenses, such as utilities, that must be paid even though business temporarily ceased.
  • Covers expenses of operating in a temporary location while repairs to the permanent location are completed.

This is designed to replace income your business would have incurred had no loss occurred. Business income is generally defined as the net profit or loss before taxes, plus continuing normal operating expenses, including ordinary payroll (payroll for employees other than officers, executives, department managers or employees under contract). Coverage is generally limited to the loss of income sustained until the property is restored, and/or a specific timeframe following the loss.

What to think about if you’re considering Business Interruption Insurance, or renewing:

  • Business Interruption Insurance cannot be purchased on its own; it must be added to a Property Insurance policy or included in a Business Owner’s Insurance policy.
  • Policy limits should be sufficient enough to cover a large amount of time to rebuild the permanent business space. Generally the business must be closed for several days before coverage begins, and it does not pay for those days retroactively.
  • Price of coverage depends on the risk of disaster to the premises. This may depend on the business location, nature of the business and how easily the business could function at an alternate location on a temporary basis.
  • It’s important to review ordinary payroll annually when considering your possible losses. In the past, manufacturers chose not to insure their direct labor costs—unskilled labor was easily replaced. Consider if that’s still true in your marketplace today.
  • Think about/review your projected timeframe for resuming business. After a major loss, getting up and running takes much longer than you may anticipate and can cost much more, too.
  • You may be back in business but your customers may continue going to your competitor. An Extended Period of Indemnity extension may be necessary to give you more time to restore your business to pre-loss level.

Why do I Need Business Interruption Insurance?

Business Interruption Insurance has evolved into an essential risk transfer tool for all industries. Coverage provides resources that aid in recovery and can help get a company back on its feet quickly.

A small business owner ‘s restaurant in Mississippi was devastated by Hurricane Katrina, leaving her with a blown-out ceiling, massive equipment damage and an unsalvageable building security system.

“The Business Interruption Insurance paid for the 23 days we were down,” Joy Hoda told the Insurance Information Institute. “Just by getting that money, it wasn’t so hard for us to make our payroll.”

It’s not to say that Joy did not sustain a loss; her Business Interruption Insurance reimbursed her for everything she would have made, minus any expenses the firm would have incurred. What the insurance allowed her to do was continue to pay her staff, meet her credit obligations and quickly reopen her business to help serve the people of her neighborhood.

Business Interruption Insurance doesn’t just assist small businesses in meeting payroll and bills during a crisis. For larger businesses, Business Interruption Insurance can provide employees and shareholders peace of mind, knowing a business’ profits are protected in case of fire, tornado, hurricane or other disaster.

We know that business insurance can be a challenge to understand. Let our team help you uncover your exposures and develop a sensible plan today. Don’t wait until your business experiences a significant loss to consider this vital business insurance protection. Contact our Specialty Risks Division to review how this type of coverage can fit into your overall business insurance portfolio.

Click to Download this worksheet to determine your organization's Business Income Needs