Many types of events can create business interruptions, although COVID-19 has certainly had the biggest disruptive impact in a long time. The Yelp September 2020 Local Economic Impact Report noted that as of August 31, 2020, 163,735 total U.S. businesses with Yelp listings have closed since the pandemic began (calculated as of March 1, 2020).
As COVID-19 cases increased and local restrictions tightened, both permanent and temporary closures rose across the country, with 60% of closed businesses deciding not to reopen. Yelp concluded that there had been 97,966 businesses that had permanently closed, with the hardest hit focused on restaurants and retailers in highly impacted areas like California, Texas, Florida and New York.
Prior to the pandemic, reports like the Allianz Risk Barometer 2020 - Business Interruption report remind us that other situations can cause physical damage to a business and lead to extra expenses and business income disruption. These events include fire, water damage from natural disasters or pipe ruptures, cyber incidents (such as breaches), machinery breakdown and supplier interruptions. The same report illustrates that business interruption can lead to significant costs. Events involving fire or explosions cost an average of $6.7 million in business interruption expenses.
With these potential risks, it makes sense to consider adding business interruption insurance to your portfolio. Here's what you need to know about this type of insurance.
What is business interruption insurance?
Business interruption insurance is a type of insurance coverage that can replace business income lost during events that disrupt operations. A company cannot buy separate business interruption coverage by itself. Instead, this coverage is added to an existing property or casualty policy or included in a company's package policy as a rider or add-on insurance product.
What does business interruption insurance typically cover?
A typical insurance policy for business interruption covers lost income, operating expenses, loan payments, payroll, taxes and even the cost of a move to a temporary location if the business can no longer operate in its original location. In certain situations, business owners can use this insurance when a civil authority decides to shut down a company due to physical damage that renders the surrounding area unsafe.
However, many insurance companies that offer business interruption coverage do not reimburse policyholders if their business has closed due to a pandemic, such as the coronavirus. Some all-risk insurance policies even have specific exclusions for losses due related to viruses.
Other losses that are generally not covered include items broken during a covered event, flood or earthquake damage typically covered under a separate policy, utilities, and income that is not listed in the company's financial records.
It is important to read and understand all the policy language to ensure familiarity with the full scope of business interruption coverage, including any applicable time limitations.
Types of Business Interruption Insurance Policies
As a small-business owner, consider these different types of business interruption insurance coverage.
Service Interruption Coverage
Some business interruption insurance covers service interruptions. This type of coverage provides business income coverage due to direct physical loss, damage or destruction to operational elements of the business. Examples include electrical, gas, water, sewer, telephone, transmission lines and other utility service equipment.
There may be some limitations related to the physical distance between the insured premises and the location of business income loss. Some common exclusions are natural disasters (such as earthquakes and floods) covered by other insurance policies.
Contingent Business Interruption (CBI)
The CBI extension is intended to cover an insured’s business income loss due to physical loss, destruction or damage of property that is owned by others but nevertheless disrupts your business.
Examples include direct product and service suppliers that deliver to the insured as well as direct receivers of goods or services that are manufactured or provided by the insured. Sometimes, the CBI extension can be extended to indirect or second-tier suppliers.
Leader or Attraction Property Coverage
Another potential component of business interruption insurance is a leader property endorsement. It provides coverage to the insured for direct physical loss, damage or destruction to property that is not owned or operated by the insured. The property must be located within a stated distance to the insured’s business and proven to attract business.
For example, if your business was located next to an amusement park, casino or shopping center that had to shut down due to some type of loss, damage or destruction, leader or attraction property coverage would compensate you for the disruption to your business.
Civil or Military Authority Interruptions
This coverage applies to situations where there is a loss over a specific length of time when access to a property or business is prohibited by military or civil authority. This insurance extension is often already included in most policies that insure business income or business interruption.
Know What Your Policy Covers
It is important to read and understand all the policy language to ensure familiarity with the full scope of business interruption coverage, including any applicable time limitations. Should a loss or interruption occur, you will be better prepared to file potential claims and take the next steps in your business continuity plan, including reopening.
You also need to know what's covered so you can decide how much business interruption insurance you need. Use your gross earnings to estimate future profits and select the appropriate amount of coverage. Keep in mind that any business income costs that exceed the coverage limit will have to be paid out of pocket. The cost of business interruption insurance will vary, depending on the selected amount of coverage, the specific industry, the number of employees, your location and any prior claims.
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