Business Interruption Insurance: All You Need to Know

Building a business from inception is difficult. Low sales, the need to constantly improve profits and services — not to mention the mammoth of expenses — can drive a business to its knees. And when normal business operations are interrupted for a significant period, most business owners are forced to shut down the enterprises. 

Business interruption insurance comes in handy in such scenarios. While most businesses have other types of insurance policies such as property insurance, fire insurance, and liability insurance, most entrepreneurs are quick to dismiss business interruption insurance, until they are faced with the peril. If you run a profit-making venture, business interruption coverage can save the day when normal operations are curtailed. 

What is business interruption insurance?

Business interruption insurance replaces lost income to a business in the case that certain occurrences lead to loss of income. For instance, natural disasters can occur, or even fires, preventing a business from running its normal operations. Although business interruption insurance is available for businesses, it is not sold as a separate policy. Rather, business owners can purchase the insurance by adding it to their comprehensive policy or the casualty/ property policy. 

Is business interruption insurance important?

Yes. This is a coverage that should not be underestimated by any company, no matter how stable they may seem. You may not have encountered an event that curtails business operations. However, such events can lead to the complete closure of enterprises. For example, if the business establishment catches fire and everything is run down to the ground, without insurance coverage rebuilding can take ages. 

Insurers base the payable amount on past financial records. Coverage is provided until the lapse of the business period, upon which the business can renew the coverage. When shopping around for coverage, you have to factor in the business interruption insurance costs and coverage provided. 

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What coverage is included in business interruption insurance?

Business interruption insurance Canada provisions are very clear. While the coverage differs with insurance providers, most coverages include:

• Fixed costs

These are the operating expenses incurred to run the business. 

• Profits

Your insurer will use your prior financial performance to reimburse profits that would have been earned if the catastrophic event did not occur. 

• Training and commission cost

When an event leading to business interruption occurs, businesses often need to replace machinery. They can also choose to hire new staff or retain their employees. The business interruption insurance should reimburse costs incurred in the process. 

• Temporary location

In catastrophic events, businesses often need a new location to resume operations. Some insurers provide coverage for the costs incurred in moving to the new location. 

• Employee wages

 This is vital if an enterprise does not want to lose its employees, seeing that training new ones can be expensive. This coverage helps businesses pay their employees before they resume operations. 

• Civil authority egress

 A civil authority egress occurs when government authorities force businesses to close. If such a mandate causes financial loss, the insurer should provide coverage for the losses incurred by the business. 

• Loan payments

This insurance provides coverage for business loans in instances where the business cannot repay the loan due to an interruption.  

• Taxes

Even when disaster hits, the government still needs businesses to pay taxes. In the case of an event leading to business disruption, the insurance will pay the taxes. 

What are the exclusions of business interruption insurance?

As with any insurance, business interruption insurance has some exclusions. This can differ by insurance provider. Among the most common exclusions include terrorism-related activities, war risks, contamination, pollution, civil commotion, and riots. Some insurers can also exclude broken items such as glass, undocumented income, utilities, and pandemics. Before you purchase business interruption insurance, ensure you go through the fine print in your policy. Take note of any exclusions and other factors that can nullify your claim.

What factors determine the cost of business interruption coverage?

• The size of your business

A large business will be more expensive to reimburse in case an insured peril occurs compared to a small business. This means that the cost of the premiums will be higher. 

• Annual turnover

Before purchasing coverage, your insurance provider must factor in the annual turnover. While you may be tempted to underestimate the annual turnover to reduce the premiums, remember businesses with a lower turnover receive less compensation. This can leave you with an immeasurable amount of costs that can even hinder your ability to resume operations. 

• The commercial property value

The more the value of the commercial property, the higher your premiums. However, this also translates to higher payouts. 

• Location

Some locations are more prone to risks than others. For instance, if your business is located in an area that is prone to natural disasters, the premiums will be higher. 

• The coverage limit

This is the maximum amount that an insurance provider is required to pay in case of a claim. The higher the limit, the more the premiums. If the coverage limit is exceeded in a claim, the insurer is not responsible for the amount that exceeds the limit. 

• Industry and associated risks

 Businesses are exposed to different risk levels, with some being higher than others. If a business is exposed to more risks, it will pay higher premiums. For instance, hotels have a high risk for fires. As such, they are likely to pay higher premiums than a business in an office setting. 

How much business interruption coverage should you purchase?

As we mentioned, business interruption insurance cost varies across businesses. However, if you are unsure of the amount of coverage to purchase, consider factors such as the industry, business profitability, number of employees, and the risk level. Also, evaluate your risk levels to named perils. For instance, if you are located in an area that has never recorded cases of storms, adding storm coverage is just an added cost that you do not need. Common business interruptions are caused by fires and explosions, machine breakdowns, strikes, vandalism, riots, human error, floods, and power interruption. Talk to your insurer and tailor the insurance as per the needs of your business.