Understanding Business Interruption Insurance
If you own or run a business, you already know how important it is to have property insurance, especially liability insurance. But what do you do if you suffer a business interruption, such as a property insurance claim forcing your business to close temporarily? Revenue drops to zero. Often, payroll still has to be paid. Your rent or commercial mortgage is still due on the 1st. Utility bills and loan statements keep rolling in. Seasonal slowdowns are one thing, but when your revenue drops to zero unexpectedly, everything you have worked to build may be at risk.
When it comes to business interruption coverage, there are often three misconceptions:
- It’s too complicated and needs an accountant to understand.
- This coverage is only needed if the business is operating at a profit.
- That the business can find someone at fault, and litigation will provide them with the protection needed.
These are everyday things we hear when our brokers are trying to discuss business interruption coverage. However, it simply isn’t true. You can seek litigation if someone is at fault for damages, but relying on that strategy alone can be very dangerous for your business’s safety and risk management. So let’s break it down and get into detail about what this coverage is and how it can be used
Business Interruption Insurance
This coverage pairs with your business property insurance or business owners’ policy to provide a lifeline when a claim affects your revenues. Your coverage can replace the revenue you need to protect your business’s future. Simply put, this coverage is designed to pay necessary expenses to help maintain profit. The coverage is designed to provide indemnity from the date of loss until the sales return date. As for what counts as ‘necessary’ expenses, you define those into two categories: fixed and sem-variable. Fixed expenses, such as mortgage payments, continue regardless of whether your business is open or closed. Sem-variable expenses are those that ‘might’ continue after a loss, such as advertisements, utilities, and travel.
Here is a real-life example. Let’s say you own a retail business. Business is growing, and you are carving out a niche in the local market. Your business is on a busy road, so visibility is excellent and in high demand. There is every reason to be optimistic about your business’s future.
One day, a car veers off the road and crashes through the front of your store, breaking the window, door, and showcases and damaging a wall. Fortunately, nobody is seriously hurt. And thank goodness you have property insurance for the repairs and damage to the showroom.
However, you might close your doors for a while — significantly since the car crash damaged a wall as well. In this real-life example, the wall was a load-bearing wall—engineers from the township schedule endless meetings, surveys, and inspections. You can complete basic repairs in days, but, in this case, the process could take weeks — or even months. You are out of business until the township says the building is safe; this can affect your neighbouring businesses.
Plan for the Unexpected
When you began your business, you wrote up a business plan. You detailed your plan’s business goals, expected revenues, expenses, and other factors. If you were thorough, you also detailed the challenges your business will face and overcome these challenges. Business interruption insurance’s purpose is to cover the impossible-to-predict risks that your business plan did not address, but that happen to real businesses daily.
If you already have business property insurance or are thinking of starting a business, contact your agent or broker to learn more about business interruption insurance. Coverage may be more affordable than you think, and you can better protect your business against the chaos that life sometimes sends our way.
Want a member of our team to reach out to discuss if this coverage is right for your business?