If your small business hasn't considered business interruption insurance yet, there's a good chance that you are now. Find out what business interruption insurance covers and whether or not your small business needs it.
What is Business Interruption?
Interruptions to your business can come in many forms:
A restaurant, damaged in an earthquake, needs to close for six months of restoration and repair.
A condo-owner has multiple units damaged by a hurricane and loses all rental income during the repairs.
A fire at a manufacturing company stops all operations for three months, during which the owner still pays out salaries, rent, and operating costs.
Imagine if your business property was damaged by wildfire or another natural disaster. What if you had to "close shop" for months while making repairs?
Not only could you possibly lose the profit you would've earned if the incident hadn't occurred, but you could also be facing ongoing operating costs -- such as rents, utilities, or salaries -- with no income to pay them.
How Business Interruption Insurance Works
Business interruption coverage is designed to protect your business against the loss of profit during a restoration period that it would have earned had there been no interruption to your business.
A typical business interruption policy may contain language like this:
"We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration."
Actual loss of business income means:
- Net income (net profit or loss before income taxes) that would have been earned, plus
- Continuing, normal operating expenses (including payroll)
- Minus what you actually earned during the loss period
What Triggers the Policy?
While policies vary, business interruption coverage is typically included as part of commercial property insurance and triggered when the policyholder suffers "direct physical loss of or damage" to the insured property as the result of a covered cause of loss.
Typically, business interruption coverage is meant for traditional physical loss, such as that caused by a hurricane or a fire.
Can Business Interruption Insurance Cover Pandemics and Outbreaks?
In March 2020, the World Health Organization (WHO) declared a global pandemic as a result of the coronavirus (COVID-19) outbreak.
As federal, state, and local governments took steps to protect citizens, the economic impact widened.
Can business interruption insurance cover losses resulting from this, or similar, pandemics?
Well, it depends.
The typical business interruption policy may be designed to cover your losses while your physical property undergoes repair or restoration, however...
Some policies include language that may protect your business in this situation.
Some forms of business interruption coverage apply when there is an interruption caused by a disruption to your suppliers. If a key supplier is unable to provide essential parts as a result of a covered cause of loss impacting the supplier's property, for example, then you may be able to recover for the resulting loss.
Other policies provide coverage for interruptions resulting from a "civil authority" prohibiting access to your premises as a result of damage to other property caused by a covered loss. This could come into play as government reaction to the spread ramps up.
Communicable or Infectious Disease
Some policies may expressly include coverage for losses caused by "communicable or infectious diseases" -- without requiring physical damage to your property.
When it comes to finding out whether or not business interruption coverage can help your business recover from economic losses resulting from a pandemic, the answer lies within your specific policy language.
If you're not sure, schedule an appointment with your insurance provider to go over your policy and find out.
Business interruption insurance coverage may help your business survive the economic impact of a disaster that forces you to stop earning an income while physical repairs are made to your commercial property.
And, depending on how your policy is written, it may even protect you against losses if a non-physical event causes you to stop business operations for some time, too.