Business Interruption Insurance is designed to protect the insured from loss of income in the event that the business is forced to shutdown as a direct result of an insured peril. For example, if the premises is damaged by fire (or other insured peril), in addition to the loss associated with repairing the physical damage, the insured may suffer financially because the business was temporarily shutdown or could only resume partial operations for a period of time. Lengthy closures can be disastrous, and can result in significant loss of income.
Fortunately, a Business Interruption Insurance Endorsement can be added to a business’s commercial property insurance policy to protect against this exposure.
Some common characteristics:
- Coverage is not limited to a policy period: Coverage begins at the time of loss and can continue for a specified period of time, usually 12 months. Payment will continue even if the insured’s property policy expires during the business interruption and subsequent repair.
- Coverage will pay expenses when they are expected to reduce overall amount of loss: When an event results in a business interruption, insureds will often take steps to resume business as soon as possible. In some situations, this may result in extra costs associated with renting alternate premises or speeding up repairs. These costs will be covered if it can be proven that they will reduce the overall amount of the loss the insurer would otherwise have had to pay.
- Coverage pays expenses and pays a profit: Businesses earn income to do two things; to pay expenses and make a profit. Business Interruption coverage pays for expenses which continue after a loss and lost profit.
- Coverage for same perils as Property Policy: Probably the most important aspect of Business Interruption Insurance to bear in mind is that coverage will only be provided if the damage that caused the interruption was caused by a peril covered by the business’s commercial property insurance policy. For example, if damage to a business was caused by an earthquake, and if ‘earthquake’ was not an insured peril under the commercial policy, then the insurer is not obligated to pay the claim under the Business Interruption Insurance Endorsement.
Two types of coverage:
- Earnings Form/Profits Form
- With the Earnings Form, coverage begins at the time of loss and continues until the property is rebuilt, repaired or replaced. For example, if a store burned to the ground, resulting in the obvious inability to conduct business, the coverage would begin at the time of loss, and continue until the property was restored and once again operational.
- Profits Form is similar to Earnings Form, in that it provides coverage from the time of loss, but it does not cease when the property is restored. Instead, the Profits Form provides continued coverage until the income is restored to the level it would have been had the store not burned to the ground. This form of coverage takes into consideration the fact that a shutdown can often mean that regular store customers are forced to make their purchases elsewhere during repair, and it is likely to take a long time to win back customers after a lengthy interruption.
- Extra Expense Insurance
- Extra Expense Insurance pays all of the necessary extra costs and expenses incurred by insureds when they absolutely need to be back in business soon after an interruption. Businesses such as this include banks, doctors, insurance brokers and travel agents. Coverage is limited to expenses over and above those which normally would have been incurred by the insured had the loss not occurred. This differs from ‘expenses to reduce loss’ in that there is no requirement for the insured to prove that these extra expenses would have reduced the overall loss the insurer would pay had the loss not occurred.