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Business Interruption Insurance

A natural disaster like a tornado or a fire can strike your business at any time, possibly resulting in a forced shutdown and an interruption of your normal business process. Such an event can lead to direct losses and indirect losses. Although your business's property and casualty insurance will likely cover your direct losses (e.g., any property that's been damaged, the expense of rebuilding your business facility), it probably won't cover any indirect losses. Indirect losses include ongoing business expenses and extraordinary expenses, like rent for a temporary location, that your business wouldn't have incurred if the perilous event hadn't happened.

Business interruption insurance is designed to cover your indirect losses in the event that a catastrophe prevents you from doing business. Though most lenders don't require such insurance, it can help restore your business to the same position it was in before the catastrophic event by covering the extraordinary expenses and loss of income.

What catastrophes are covered?

Business interruption insurance typically kicks in after any catastrophe that prevents a company from doing business. Common catastrophes that are covered include fire, lightning, hurricanes, tornadoes, and massive ice storms. Make sure to carefully read any policy you're considering to see exactly what's covered.

To be eligible for coverage after a catastrophe, you must report the event to your insurance company. There may be a waiting period between your report and the start of coverage. For example, some policies don't begin paying benefits until 48 to 72 hours after you report the event.

What business expenses are covered?

Business interruption insurance typically covers:

  • Loss of income during the period that your business is inoperable
  • Rent or lease payments for a temporary facility
  • Rent or lease payments for replacement furniture, machinery, and equipment
  • Tax payments
  • Salaries of key personnel

After a catastrophe, it's important to get your business up and running again as soon as possible. Your customers probably won't be able to wait very long for you to rebuild your business before they're forced to buy elsewhere. And your key employees could be forced for economic reasons to leave your business during a shutdown to seek another position elsewhere.

Even if your business has enough insurance against direct property losses, the extent and duration of your indirect losses could significantly erode your cash reserves. It's possible that your indirect losses could exceed your direct losses. For example, delays in rebuilding or repairing your facility could prolong the expenses you'll need to operate in a temporary location.

How long does coverage last?

Coverage is provided for the actual length of time needed to resume your normal business operations, and may extend for up to 12 months after the catastrophic event. The amount of coverage is based on your business's historical expenses and profits, including seasonal variations. You will be required to provide accounting records when you buy the policy.

Perilous events at other locations can still affect your business

You might think that business interruption insurance protects just your business location. But it's broader than that. Disasters at other locations can still have a serious effect on your business. For example, consider what might happen to your business in the event of a prolonged outage of gas, water, or telephone service, or if your primary materials supplier is forced to shut down. Business interruption insurance can protect your business from these types of losses that result from catastrophes that start elsewhere.

How do you buy business interruption insurance?

Check with an insurer who specializes in commercial business insurance. Typically, business interruption insurance will be part of a larger business insurance policy package. An experienced insurance professional can help you assess the right insurance needs for your business.