What Is Business Interruption Insurance?
If you are opening a business or currently running one -congratulations! Such a task is quite an accomplishment and can be very rewarding. You’re putting your own touch on the world through your products and services. It is certainly no easy feat and can be a roller coaster of an experience, with the particularly rough moments sometimes calling for you to temporarily close your doors. Your businesses can get hit by a variety of perils that, no matter how much you prepare, can disrupt your operations.
But for moments like these, there is some assistance your insurance company may be able to provide. Business interruption insurance can lend a hand with expenses during times of disaster for your business. This piece will explore what exactly business interruption insurance is, how it works, and how much room you should make in your budget to get it.
What is Business Interruption Insurance?
Business interruption insurance is a type of commercial insurance policy that covers various expenses you may need assistance with if your business has to close temporarily. Interruption insurance generally covers certain business expenses such as loss of income and payroll.
This insurance may come bundled with your business owner’s policy, or it may be purchased under a property insurance policy. But no matter how you obtain it, it all serves one purpose, and that’s to help you with keeping up the behind-the-scenes operations of your business. This can be very valuable should you have to close after a disaster. A more in-depth look into what is included in a policy, excluded, and how much it could cost you will be further addressed later in this piece.
Should Businesses Carry Interruption Insurance?
No matter what kind of business you run, you should, at the very least, be considering buying an interruption insurance policy. It can offer some very valuable assistance with expenses in unexpected times of financial need.
But with that being said, it is also a fact that larger businesses may need such insurance more than others. This typically applies to any business that has to operate out of a physical location. Businesses of this sort include factories, retail shops, or restaurants. These types of industries can rely heavily on storefronts for a majority, if not all, of their income.
You will also want to greatly consider insurance if your business has been challenged by numerous disasters in the past. This may include things such as fire or storms. Anything of the sort can disrupt business operations for an unknown amount of time. Having some level of coverage for such instances can come in handy. But in general, no matter where you are located or what industry you are in, it will always be best to have business interruption coverage as the world can be gravely unpredictable.
Why Your Business Needs Business Interruption Insurance
As mentioned briefly above, any sort of business should have interruption insurance. But you still may be wondering why you personally need this level of coverage. Perhaps you run a small business and fear such insurance may not actually be beneficial. For worries like this, it is best to remember that business interruption insurance assists you with the expenses that keep your operations afloat. Having this kind of insurance helps a wide range of aspects of your business, from your employees to profits and income. More of these specifics will be explored below but just keep in mind that the cost to close can be damaging. Even if you think it can’t happen to your business, you should still consider looking into policies. You can’t predict the future.
What is Covered With Business Interruption Insurance?
As mentioned previously, business interruption insurance helps to assist with specific aspects of your business should something force you to close the doors. What is covered is typically in the realm of operations, like costs to stay open. Outlined below are the main areas that business interruption policies cover.
Business interruption insurance can help cover loss of revenue during the time in which your shop has been forced to close. Generally, policies will cover you for up to one year. This is a pretty crucial part of a business interruption policy. Revenue is what keeps businesses afloat, so if you are on the fence about obtaining one, at least consider what this assistance could mean to you.
Rent, Mortgage, or Lease Payments
Even if your business is close, your rent payments are still going to be due. But how do you juggle that when the income has halted? Business interruption insurance has your property rent or leases covered when your business is forced to close. If you happen to own the property you are operating out of, the policy can also cover your personal mortgage payments. Also, check and see if your commercial lease requires liability insurance as one of its terms and conditions.
Just like rent, taxes are not going to halt just because your operation has. Due to this, your business interruption policy will help keep any tax obligations you have covered. It may also be beneficial to remember that interruption insurance is tax-deductible.
Employees are a key part of your business, and while you are temporarily closed, you still want to provide them with some financial compensation as they wait to get back to work. As a way to lend a helping hand, business interruption insurance will help you cover your payroll while your business is closed. Like the loss of revenue coverage, business interruption will cover your payroll for up to a year.
When you got your business up and running, you may have taken out a business loan. If you are still in the process of paying them off, nothing halts just because your business operations have. Luckily, business interruption coverage can come in to assist while you are waiting to reopen, assuring you do not miss any crucial loan payments.
Sometimes after a tragedy, your business may have to make some changes. This could include new equipment or operating systems. Due to this, when you welcome your employees back, you may also have to train them on new procedures. This type of business insurance can help cover any training expenses you may end up having once you reopen.
Cost to Relocate
Some tragedies may be severe enough that they force you out of your current property. If you find yourself in this situation, business interruption policies can lend a hand by helping to pay for any costs associated with relocating your business.
If you are forced to move locations temporarily, adding extra expense coverage to your business interruption policy can cover various aspects of the process. The extra expenses can cover rent, rental equipment, new hires (if applicable), and training for potential new employees.
What Isn’t Covered by Business Interruption Insurance?
For all that it does cover, business interruption policies have their limits. This is not unlike any other kind of insurance policy you may purchase. They all come with their own guidelines. Explored below are some areas you should watch out for when it comes to purchasing business interruption coverage.
Only assets and income you can prove you have will be covered by your insurance policy. You need to be able to prove with real quantitative data that your business has taken a hit due to being closed. This can be proven with invoices, bills, taxes, and receipts. If you fail to prove loss of revenue using one of the aforementioned, your policy cannot cover your business.
If your business experiences a prolonged interruption, account for your utilities. Even if your business is closed, your utilities will still be running, meaning you’re responsible for them. Business interruption insurance will not cover utilities like gas and water while your business is closed.
Deciding to just take some time to close your doors and halt operations will not be covered by the business interruption insurance. There has to be some substantial, proveable reason you wish to temporarily close your business for you to receive any coverage from your policy. Deciding to take a break or vacation does not count.
Sadly, with the COVID-19 pandemic, this has become a bit of an unfortunate clause in business interruption insurance policies. Due to the pandemic, many businesses were forced to close, and it is arguably a disaster that you would think would be covered by insurance, especially when many businesses had no choice in the matter. However, business interruption policies typically do not cover closure due to transmission of sicknesses like the common cold, viruses, flu, or communicable diseases.
Like many other insurance policies, a standard business interruption insurance policy will usually not cover natural disasters like floods or earthquakes, especially if they are common where your business is located. If you fear you will need this extended coverage, you will need to obtain a separate policy or rider to your general liability insurance coverage.
Short Business Interruption
Your insurance policy will only come into play if you are forced to completely close your business for an extended period of time. If part of your business is still operating and profitable, you cannot call on your insurance for help. This also goes for if you have a minor interruption that halts your operations for a short period of time. An example of this could be something like a brief power outage or a minor kitchen fire.
Average Cost For Business Interruption Coverage
Similar to other insurance types, your annual rates will be based on your business. This means your premiums could look greatly different than your neighbors. A more in-depth look into what factors go into your insurance rates will be covered in the next section, but for now, let’s look at a general estimate. Business interruption insurance will typically, on average, cost you anywhere from $50 to $150 per month. These average prices can fluctuate greatly depending on if you are considered a high-risk business or not. Despite these premiums not being set-in-stone, it is still helpful to get an idea for the average, so you have something to compare it to when seeking out quotes.
What Determines Your Insurance Coverage Rates?
As previously mentioned, a multitude of factors goes into determining what interruption insurance will cost you as a business owner. These can range from something as basic as the amount of coverage to more in-depth, like income reports. The basic factors include the industry of business, location, property, payroll, revenue, coverage amount, and claims. Outlined below is a closer look into each of these aspects that insurance companies consider when offering insurance premiums.
Some business industries are more high-risk, which means their chances of filing a claim could be higher. For example, a technology company may have lower premiums than a restaurant. This is because the restaurant industry may be more prone to interruptions which then the company would have to cover. Be aware that whatever industry you are in will directly have an impact on your insurance rates.
Location will be a major factor for pretty much any insurance policy you are trying to obtain. What zipcode and state your business is located in have a pretty big influence on your interruption insurance rates. Some places just pose more of a risk to businesses than others. For example, if your shop is located somewhere that sees a lot of flooding, then your rates will be higher. It is not very uncommon for insurances to be priced out this way.
Related in a way to the location of your business, the actual property that you are renting or leasing for your business has an impact on what your insurance company will set your rates at. The higher your property is valued, the more your premiums will be. But this could have some perks to it. With a high-value property comes a bigger payout should you be forced to close.
Due to the fact that your business interruption policy covers payroll, how much you pay your employees will affect your insurance rates. Paying out hefty salaries can cause you to pay higher premiums. But do not try curbing this by either falsely reporting payroll or underpaying your employees. Neither of those will have the beneficial consequences you desire.
Much like your payroll, how much revenue your business sees will affect your insurance rates. Once again, this is mainly because your insurance company steps up to cover the loss of your business income; therefore, they need to know how much you are taking in. The higher your income is, the higher your insurance costs will be.
Amount of Coverage
Like other types of insurance, how much coverage you want will directly impact how much you pay. But try not to let this discourage you from obtaining the proper amount of insurance you need. You never want to be caught underinsured, as that can lead to more financial issues. If you are struggling to pay for business interruption coverage, try shopping around for a better policy or inquire about discounts.
Prior Insurance Claims
The number of claims you have made with a previous insurance company can affect your premiums with your current insurance company. This is due to the fact that the more claims you make, the more high-risk you may look towards insurance companies. Insurance claims with your current company will also impact your rates. After each claim, your rates will increase a bit. This is the case for any type of insurance you obtain.
How Much Interruption Insurance Should You Get?
According to the Insurance Information Institute (III), a smart way to gauge how much interruption insurance your business needs is to calculate gross earnings and estimate future income. As your business relies so much on the income, you want to make sure that you can keep it, along with other expenses, protected through insurance coverage. If the amount of income exceeds the amount of insurance you have purchased, you could be on the hook for extra expenses. Coverage is helpful, but it may only get you so far if you try skimming by. Be honest and realistic about your income to get the best coverage for your business, even if it does mean paying a little higher rate. You never know when you will be thankful that you are covered.
Business Interruption Insurance Discounts
After getting an understanding of average annual business interruption insurance rates and the factors that go into it, you may be wondering about any way you could possibly get a break on the premiums. While direct discounts may be on a company-by-company basis, there are some major steps you could take to make sure you are not paying too much for coverage. Explored below are some ways you can adjust your premiums to be a bit more affordable.
Arguably the most important thing to do before buying insurance of any kind is to shop around and see what different insurers have to offer. This means collecting quotes from a wide variety of insurance companies and then pretty much pitting them against one another to analyze what they each offer. It is best to do this with both local and national companies as you never know who could offer extensive coverage at the best rate.
Review Your Policy
One simple action you can take when it comes to insurance is reviewing your policy every now and then. Some experts recommend reevaluating your insurance coverage once every year, depending on the type of insurance. This can be a useful practice to follow for business interruption insurance. By going over your policy regularly, you may be able to pinpoint areas of coverage you no longer need. Perhaps your business moved, and you can update your zip code for a better rate. Or maybe your payroll has shrunken for a number of reasons. Updating your insurance policy after reviewing it may not give you a steep decrease in rates, but it can offer some assistance here and there.
Be a Mindful Businessowner
Due to the fact that the number of claims you make can increase your insurance rates, it is worth your while and money to be a cautious business owner. Doing your best to keep your business safe from disasters is smart. But we must also recognize that this is not always possible or in your realm of control. In the event of extreme weather or uncontrollable fire, you have no other option but to file a claim. In those instances and others, it is always best to support from an interruption insurance policy. But going forward, it never hurts to try to take steps to prevent the unfortunate.