Introduction to Business Interruption Insurance for Business Owners June 22, 2020 – Posted in: Blog
With the economy thrown in disarray due to the pandemic that is currently sweeping across the globe at the time of writing this article, it’s no wonder how business interruption insurance became more relevant than ever.
We believe that getting your business signed up for this type of insurance is a worthwhile investment, regardless of the industry you belong to, and your business location, and in this article, we are going to tell you exactly why. Let’s get started.
What Is Business Interruption Insurance?
Before anything else, let us first define what business interruption insurance is. In a nutshell, it is the type of insurance that you can rely on to cover the cost of revenue loss, daily expenses, rent, and relocation in the event of a catastrophic event such as a fire or hurricane.
In understanding what is business interruption insurance, we have also found that some of our readers commonly mistake it for commercial property insurance.
They are not the same, though. Commercial property insurance typically only covers damage to your property. Therefore your other needs, such as your employees’ wages as you deal with your temporary crisis won’t be covered. It is important to note that certain catastrophic circumstances may not be a part of commercial property insurance coverage as well, like earthquakes and floods. For this reason, businesses located in flood-prone areas sometimes supplement their plans with a separate flood insurance program.
Common Causes of a Business Interruption
On the other hand, most of these crises might fall under the coverage of a comprehensive business interruption insurance plan. Here are some examples of what qualifies as a “business interruption”:
- Infectious Diseases. There are two instances where your business operations may become disrupted due to an infectious disease. First, it can be the contamination of your premises if it has been deemed unfit for your immediate use. And second, if you are forced to follow government restrictions, such as when non-essential businesses were temporarily closed down during the pandemic in order to curb the spread of the disease.
- Water Damage. Speaking of infectious diseases, another health-related reason that can force your establishment to temporarily suspend operations is water damage, especially if it has already severely affected your property’s indoor air quality due to mold growth. Aside from that, it can also cause extensive damage to property, especially on furniture and office equipment. Water damage can be caused by something as simple as unnoticed roof leaks or as catastrophic as flooding.
- Fire Damage. This is probably the most common reason why business owners apply for this type of insurance in the first place. After all, there are establishments like restaurants and industrial factories that are particularly more vulnerable to fire and explosions than others. Smoke damage is a cause of concern as well.
- Natural Disasters. Finally, businesses can be thrown off course at any time by a random natural disaster like an earthquake, tsunami, forest fire, hurricane, or more. It’s a catastrophic event that is simply impossible to predict.
What Is Covered in Business Interruption Insurance?
Fortunately, most of the circumstances we have mentioned above, and sometimes even damage to property such as vandalism and theft, are usually included in a business interruption insurance coverage.
Is Covid-19 Covered by Business Interruption Insurance?
Honestly, there are policies that only cover specified known diseases. Hence, due to the newness of the Covid-19, there is a huge possibility that it might not be included. We recommend checking your policy for “Special Extensions” as this might extend your coverage to Covid-19 related losses.
How Much Does Business Interruption Insurance Cost?
Anyway, now that we know the rough basics of the extent of coverage of this type of insurance, we can move on to discuss business interruption insurance costs.
The average cost for this type of insurance coverage ranges from $40 to $130 per month. If you’re wondering how is business interruption insurance calculated, then remember to consider the following factors below:
Different establishments fall under different risk assessment levels. For instance, restaurants are more prone to fires and explosions compared to a real estate office. Hence, it’s no surprise that a restaurant would probably pay more for coverage.
Commercial Property Value
Aside from the risks, insurance companies consider the value of your business as well, especially the property that it’s located in. After all, they would have to cover the relocation costs if needed.
Another factor that goes into your premium computation is the revenue of your business. As we have mentioned above, compensating for the loss of revenue is part of the coverage. Hence, you can expect a higher premium if you have a high-revenue business. Don’t worry, the payout will definitely be higher as well.
There are two reasons why location matters in the computation of your premiums. First, there are establishments located in better areas and business districts with higher traffic and thus experience better revenue. Second, there are also locations that are more prone to natural disasters such as those situated by the coast or those near an active fault line.
Previous Business Interruption Claims
Finally, your insurance company will also consider the claims that you have already previously reported as they will consider your history as part of their risk assessment. In the end, it is best to seek out a preliminary computation for the policy that you’re eyeing for in order to get a better estimate of your potential monthly premium.
How Long Does Business Interruption Insurance Last?
While specific policies differ from each other, one can generally assume that the coverage should last until your business goes back to its optimal state pre-crisis, or until the damages have been fully restored or rebuilt. Having said that, most insurance companies recognize that while businesses may resume partial operations in order to compensate for their losses, it is not a reason to terminate coverage.
Tips to Reduce the Risks of Suffering a Business Interruption
Now, while having a business interruption insurance policy is indeed a good way to protect your business in case of unforeseen circumstances, the best way is to still do your best to prevent these untoward incidents from happening in the first place. Thus, here are some tips:
- Implement systems and safety protocols that your employees can follow in order to prepare them and minimize damage and injury.
- Invest in safety equipment like fire extinguishers and smoke detectors.
- You can also get water damage restoration equipment to reduce water damage immediately, as well as dehumidifiers and air scrubbers to improve indoor air quality.
- Finally, plan a comprehensive risk management program.
Business interruption insurance, in its essence, is a type of coverage that seeks to protect business owners from bankruptcy in case of a natural disaster or emergency. As such, we believe that it is a worthwhile investment for any type of business owner regardless of the scale of your enterprise and the nature of your products and services.
There are different circumstances that fall under this plan’s coverage, and yes, infectious diseases like the Covid-19, is one of them.
Should you decide to apply for this insurance, though, it is important to note that there are different factors that are considered to compute your premiums and the amount of compensation that you can expect to get in return. Rest assured, however, that you will be able to reap the benefits from the moment the business disruption starts up to the state that it returns to its usual operation.
In the end, however, it’s still best to practice various measures even with your coverage, in order to prevent business interruption in the first place. Good luck!