Business Interruption Insurance – Explained
Guys, today we shall be discussing all the key aspects of Business Interruption Insurance. How does it work? Does a Business Interruption Insurance plan cover everything? There have been so many frequently asked questions about Business Interruption Insurance asked to us by our readers.
Most Business owners want to know more in-depth about how Business Interruption Insurance plans work and how to choose the best Business Interruption Insurance for themselves. So, this article will cover all your queries regarding Business Interruption Insurance.
The ongoing COVID-19 pandemic has already disrupted many businesses and economies around the world. It will take an eternity for them to revive and thrive again.
Multiplying these challenges for businesses are the major recent civil unrest in major parts of the globe including the USA along with the threatening natural disasters that keep striking the world population and adding to the losses in their businesses.
These unstable trends mean it’s necessary for business professionals to comprehend exactly how their Business Interruption Insurance policies will respond to potential losses in businesses, which includes covering business income or business interruption coverage.
What Is Business Interruption Insurance?
Business interruption insurance coverage basically is an insurance coverage plan that compensates business income lost in some sort of disaster. This disastrous event could be anything from a usual fire or a natural disaster or any other act of God, as mentioned in the respective insurance policy. Most people prefer Insurance policies that cover Business Income or include business interruption coverage.
Generally, Business Interruption Insurance is not sold as a separate policy but is either added to a parent property/casualty policy or could be included in a Comprehensive Insurance Coverage policy as an add-on or rider.
Basics of Business Interruption Insurance:
To start with you must understand Business Interruption Insurance premiums and all the additional costs of the rider fall under ordinary business expenses and are tax-deductible. One might wonder when does such business insurance pays out? Well, such a policy pays out only if the cause of the business income loss is brought under coverage in the underlying property or casualty policy.
Based on the previous financial records of the business the amount payable is determined in such cases. Any Business interruption insurance coverage normally lasts until the end of the business interruption period or till the policy ends. This time period is mentioned in the insurance policy.
But according to the Insurance Information Institute, the standard Business Interruption Insurance policy is made for 30 days, which can be extended to 360 days, using an endorsement.
Generally, business interruption insurance policies define the aforementioned period of the policy as the date from where the covered hazard began up till the date that the damaged property is physically repaired plus returned to the business in the same condition that existed before the disaster struck that business. At most, there can be a waiting period of 48 to 72 hours.
What is drafted/addressed in a Business Interruption Clause or Endorsement?
Many of the insurance provider’s insurance policies include “business interruption or business income” mentioned as coverage within the form. Other insurers (including those insurers that use Insurance Services Office (ISO) forms for their policies’ content) mention this “business interruption or business income” coverage via some endorsement.
The sole purpose of a business interruption clause or endorsement is to protect the insured party from the losses of business income it has sustained as a result of direct physical loss, damage, or destruction to insured property by a covered danger that is mentioned in the respective insurance policy.
Although many types of clauses are written these days to mention various aspects of an insurance policy today, a typical business interruption insurance clause might read as follows:
We shall be liable to pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension of your “operations” must be caused by direct physical loss, damage, or destruction to insured property. The total loss or damage incurred must be caused by or result from a covered cause of loss.
Though the contents of individual policies and endorsements may differ somewhat, most of these are written in relatively similar language to describe business interruption coverage.
What Business Interruption Insurance Covers:
To get a better understanding of this insurance cover and how it will respond to the potential losses a business might have to face, it’s very important for risk professionals to focus on eight key concepts. These key points have been discussed here.
Generally, Business Interruption Insurance coverage includes the following:
- Profits: Business Interruption Insurance usually covers your business profits based on the previous month’s performances or an average of the past few months’ profits. A Business Interruption Insurance policy will provide compensation toward profits that would have been earned, had the event not occurred.
- Employee Wages: Insurance Coverage of employees’ wages is very essential if a business does not want to lose its valuable and skilled employees while shutting down. This business insurance coverage does help a business owner make all the payrolls when they are not able to operate the business due to any of the covered causes.
- Loan Payments: It’s quite common for most businesses to have a lot of debt to perform their operations, and they have to repay these loans in time. Loan installment payments are often due monthly. Business Interruption Insurance coverage can also help a business make all such payments on time, even when they are not generating income.
- Civil Authority Entrance/Exit: In an unfortunate event of business interruption, the government can intervene and impose a government-mandated closure of business premises that will directly cause financial losses. There are a lot of examples of situations where the businesses were forced to close down because of government-issued curfews or street closures related to an event.
- Fixed Costs: These can include operating expenses like labor costs, salaries, production costs, rents, etc., and all other incurred costs of doing your business, depending on the terms and conditions of your Business Interruption Insurance policy.
- Commission and Training Cost: In the event of a business interruption, a company usually needs to replace most of its machinery and retrain its workers on how to use the newly acquired machinery. Business interruption insurance can cover these extra costs too if they are included and mentioned in your policy.
- Temporary Location: Some Business Insurance policies cover the costs associated with moving to another location and operating from that temporary business location.
- Taxes: Businesses or Companies are still required to pay their due taxes, even when disaster hits its functioning, and it is not able to perform its business operations. A Business Interruption Insurance usually includes general Tax coverage, that will ensure that a business can pay taxes on time and avoid penalties.
- Miscellaneous Expenses: A business interruption insurance policy will also provide compensation for reasonable costs as well (beyond the fixed costs) that allow the business to continue operating while the business gets back on right track with a solid foundation.
What Business Interruption Insurance Does Not Cover:
Apart from noticing what is included in Business Interruption Insurance coverage, a business owner should also keep in mind all the items that shall not be covered in the Business Interruption Insurance plan. According to the Insurance Information Institute website, the business insurance policy will not cover:
⦁ Any Broken items resulting from a covered event or loss (such as glass).
⦁ Flood or earthquake damage is covered by a separate policy.
⦁ Undocumented income that is not listed on your business’s financial records.
⦁ All the Utilities used in your business operations.
⦁ Loses due to Pandemics, viruses, or communicable diseases (such as COVID-19).
Note:- It should be duly noted that the insurer or the insurance provider company that is providing the Business Interruption Insurance coverage, is only obligated to pay compensation to the policyholder if the insured actually sustains a loss as a result of the unavoidable business interruption. The monetary amount compensated to the insured business shall not exceed the limit stated in the policy.
Business Interruption Insurance vs Pandemics like Covid 19:
Business owners have been worried all around the globe about whether the Business Interruption Insurance policy will cover or will not cover their business losses incurred due to the COVID-19 outbreak.
The unfortunate answer to this question is that for most policyholders, the Business Interruption Insurance policy will not cover their business losses incurred during the Corona Virus (Covid-19) pandemic outbreak.
As hypocritical as it may sound, the insurance companies believe that the Viruses don’t actually break anything. According to industrial experts, epidemics or pandemics leaves no visible imprint, like the imprints of a fire or broken windows from wind damage which are visible and can be claimed for compensation.
As a standard norm, usually, the insurance claim on Business Interruption only applies in cases when the business sustains direct physical loss or damage, such as fire, etc.
Business owners all over the world must know that even an all-risk business interruption insurance coverage plan has exclusions. One must read all terms and conditions thoroughly and carefully before taking up any insurance policy for their businesses or for any other coverage for that matter.
In those boring documents somewhere it is clearly mentioned what shall be and what shall not be covered in that particular insurance coverage plan. Moreover, especially after the SARS virus outbreak in 2003, these terms have been reiterated and those exclusions have tended to include losses from outbreaks of all such viruses and communicable diseases.