Have you ever heard of the term “business interruption insurance?” Many people haven’t, because it’s not something that they ever need. However, we’re living in an era where this type of insurance is more critical than ever before.
We’ll take some time to talk about this insurance variety, as well as what companies need to have it.
What Exactly is Business Interruption Insurance?
Business interruption insurance is:
- Coverage to replace business income lost because of a disaster
- A smart thing for many kinds of businesses to have
Let’s say that there’s a disaster that wipes out your brick-and-mortar location. This type of insurance will shield you from income loss.
Insurance companies don’t sell it as a separate policy. Instead, you can get it as a rider or add-on to a property or casualty policy. You can also get it as part of a broader comprehensive policy package.
What Are Some of the Costs That It Covers?
Usually, you can look at this type of insurance for coverage of costs like:
- Loan payments that you can’t make because of the disaster
- Taxes
- Payroll
- A move to a temporary location while you make repairs
Basically, this insurance exists to cover operating expenses during a disaster recovery time. Some rare cases even exist where this type of insurance can cover you if a civil authority shuts down your company.
The reason for this might be if there is physical damage to a nearby business that’s affecting your company as well. This sort of thing is much more common with brick-and-mortar locations. If you operate exclusively through eCommerce, then you rarely need the insurance for these purposes.
Does It Apply Because of the Pandemic?
These days, many businesses with this type of insurance are wondering whether they can use it for help in the face of Covid-19. With the pandemic ravaging the country, and the world, many businesses face unprecedented difficulties.
Standard business interruption insurance doesn’t cover pandemic-related losses. That’s not something that policyholders want to hear at this time. Unfortunately, most of these policies have explicit language saying they don’t have to pay out for viruses or bacteria.
The policy-makers are clever. They anticipate possibilities like pandemics and guard themselves against them.
Determining How Much Compensation You Get
If your policy pays out, it’s going to do so based on your previous earnings and expense statements. You’ll need to look at the way the underwriters wrote the policy as you’re trying to figure out how much money you get, as well as what exactly it covers.
If the underlying property or casualty policy seems to cover your losses, then you’ll receive payment based on your past financial records. You’ll probably need that money badly if you’re going to stay in business after the disaster, whatever it happens to be.
How Long Do You Get That Money?
The time length for you to get that money depends on several factors. Essentially, you’re supposed to get it till the end of the business interruption period. But how do the policy-makers determine that?
This can occasionally be a contentious point between policy-makers and holders. Some standard policies only help you out with payments on the various things we mentioned for 30 days. If you’re facing a real calamity, then getting back on your feet in 30 days might be impossible.
However, in other instances, you can get payments for as long as 360 days. Most policies say something to the effect that they’ll cover you from the first interruption date to when you repair the physical damage.
Limitations with This Type of Insurance
You’ll sometimes run into trouble when you repair the physical damage, but your customers aren’t back yet. Think about a disaster like the New Orleans flood in 2005 during Hurricane Katrina.
In that scenario, there were plenty of businesses with some form of business interruption insurance. If there was ever a cause to collect, that was it. However, even though some companies repaired the physical property damage with policy help, that didn’t mean that their customer base came back.
This isn’t the insurance underwriters’ fault, but sometimes, when there’s a disaster, fixing your brick-and-mortar location can’t save your company.
With Katrina, many individuals and families had to leave, and some never returned. Many businesses went under, even with insurance help propping them up.
Is It Worth It to Get This Type of Insurance?
Even though there are some limitations to this type of insurance, it’s usually still in your best interest to get it. If you have a brick-and-mortar store location, or more than one, you’ll need help if something happens and you don’t have any more income from that source.
You’ll need to cover things like replacing machinery and retraining personnel. You’ll still have to pay taxes even when a disaster occurs, and this coverage can help you there. There are lots of other expenses that continue piling up, even as you’re trying to get back on your feet.
What About Extenuating Circumstances?
At the moment, these policies are getting more scrutiny than usual because of the pandemic. We already mentioned how that’s normally not something that this type of policy covers.
However, some government bodies are wondering about how fair this is since this is an unprecedented time when there’s widespread business closures, unemployment, a housing crisis, etc.
It all goes back to the policy language, though. The reality is that viruses don’t break anything, and that’s the real sticking point as to why these policies won’t payout. The policy-makers are not liable, even though that upsets many business owners.
Right now, with so much of the country struggling, it’s mostly up to the government to try and help floundering businesses stay afloat. It’s inevitable, though, that some of them are going to fold.
That doesn’t mean that you shouldn’t at least think about business interruption insurance for your company. There are still many situations where it comes in handy.
