If you had to close your doors or stop taking orders for two weeks or two months, what would happen? Would you be able to recover? Will you be able to meet your payroll? Would you be able to keep up with tax, insurance, lease, rental and mortgage payments for that long?
What about your employees? Would you lose key workers who would be very difficult or impossible to quickly replace in the event of a disaster or other event that would force a lengthy shutdown?
It’s not just a rhetorical question. Thousands of businesses face a similar crisis every year as a result of natural disaster, man-made disasters, civil unrest, and a variety of other factors.
Studies show that only a fraction of small businesses get back on their feet after surviving an interruption of only a few weeks. The costs to their owners and in some cases, employees, are enormous.
Insuring Against Business Interruption
Business interruption insurance compensates businesses for income lost as a result of a covered disruption in business operations, or damage to the business premise.
For example, if you are forced to cease operations for 90 days as a result of a fire or flood your fire or flood insurance policy will cover your material loss (over and above your deductible and subject to policy limitations). They will cover your building and its contents, for example. But only business interruption insurance will replace the income you lost while you were getting your business back on your feet.
Definition of Business Income
Generally, policies available define “business income” normal operating expenses such as rent, mortgages, insurance premiums, taxes and payroll, plus profits that the business normally would expect to incur had operations not been interrupted by a covered risk. It would not provide coverage during unprofitable periods. For example, benefits paid to a ski resort over the summer would be very different from benefits paid if the interruption were to occur during ski season!
In many cases, insurance carriers operating in this market will help you with costs you incur to mitigate income loss. For example, if you can reduce the amount of your lost income by leasing an alternate office space while you get your business back on its feet, your carrier may help you with that expense as well, if it means reducing your overall covered loss.
Loss Period Calculation
Most policies begin calculating benefits beginning 72 hours after the interruption begins, or the damage to the premises actually occurs. Benefits will end as of the date the business resumes normal operation, or as of the date the lost equipment and facilities should have reasonably been replaced or repaired to enable full resumption of business activity. If you decide to spend more or wait longer because you decide to make improvements to your facility that take longer to accomplish, that part is not normally covered in a business interruption policy. The policy is simply designed to protect you against the negative impact of a loss of income.