Editorial · September 22, 2020
Business Interruption Insurance: What Policies Cover
Business interruption insurance pays a business for lost income when a covered loss, such as a fire, forces it to slow down or close. It is not a general safety net. Most policies pay only when direct physical damage to property causes the loss. This guide explains what the coverage pays for, where it stops and how to read your own policy before you need it.
What the coverage pays for
Business interruption coverage is often called business income coverage. It replaces the income your business would have earned if the loss had not happened. It also pays ongoing costs that do not stop when the doors close, including payroll.
The payout is based on your net profit or loss plus those continuing expenses. It is not based on sales alone. Keep clean books, because you will need them to show what you normally earn.
Many policies start paying only after a short waiting period, commonly 24 to 48 hours. Recovery also tends to take longer than owners expect, so check that the limit covers more than a few days.
A related cover is called extra expense. It pays added costs above your normal spending, such as renting a temporary space or leasing equipment while repairs are done. Some insurers bundle it with business income coverage.
The key test: direct physical loss
The most important phrase in these policies is direct physical loss or damage. In plain terms, something has to physically harm your property first. A fire, a storm or a burst pipe fits. A drop in customers on its own does not.
In April 2020, the Insurance Information Institute, also called Triple-I, put it this way. Its chief executive said business interruption policies generally require the losses to be caused by direct physical damage to the business's property. The group added that the tornadoes that struck that month would likely produce many covered claims.
This is why the same policy can pay one owner and not another. The cause of the loss matters as much as the size of the loss.
Add-ons that reach beyond your own building
Some policies extend to events away from your premises. Two common ones are worth knowing.
Civil authority coverage pays lost income or extra costs when a government blocks access to your business because of a covered loss nearby. It still depends on physical damage, only at a neighboring property instead of yours.
Contingent business interruption covers income you lose because a supplier or a customer has physical damage at their site. To use it, you need records that show how much each one contributes to your earnings. Some supply chain policies also cover non-physical disruptions, but you have to read the wording to know.
Common exclusions
Every policy lists what it does not cover. Read this part first.
Flood is a standard example. Most standard commercial policies exclude it. Flood cover usually comes from a separate policy, and it is worth asking whether that policy includes business interruption at all. The National Flood Insurance Program caps its coverage at $500,000 for a building and $500,000 for contents, with a 30-day waiting period.
Viruses are another. In March 2020, Louisiana Insurance Commissioner Jim Donelon told a newspaper he had never seen a policy that does not exclude business losses caused by a virus. He added that some policies are unusual, so exceptions are possible. A regional spokesman for the Insurance Information Institute said he had never seen policies that pay business interruption claims for virus outbreaks.
In April 2020, Triple-I said standard policies clearly exclude losses from viruses and bacteria. Owners who had been shut down by government orders were then arguing that the orders, not the virus, closed them. The same Louisiana article reported that, for floods and hurricanes, shutdown claims generally need physical damage to the premises or to nearby property.
How to read your own policy
You can check your coverage in a short sitting. Pull out the policy and look for these items.
The trigger. Find the words direct physical loss or damage. Note which causes of loss are covered and which are excluded.
The waiting period. Find how many hours pass before payment begins.
The limit and the length. Check how much the policy pays and for how long. A limit that runs out in a few weeks may not be enough for a long rebuild.
The add-ons. See whether extra expense, civil authority and contingent coverage are included, and what each one requires.
The exclusions. Read the flood, virus and other exclusions in full.
If a line is unclear, ask your agent or broker for a written explanation. The time to ask is while your business is running, well ahead of any claim. Policies differ, and the exact words in yours decide what is paid.
Sources
- Insurance Journal, October 4, 2013: insurancejournal.com/news/east/2013/10/04/307285.htm
- InsuranceNewsNet, April 15, 2020, Triple-I press release: insurancenewsnet.com
- InsuranceNewsNet, March 24, 2020, from The Advocate: insurancenewsnet.com