Did you know that nearly 40% of businesses do not reopen and another 25% fail within a year after a catastrophe or disaster? The actual loss or damage to buildings, facilities and property is often the reason for this frightening statistic, but it isn’t the only reason. Businesses are increasingly struggling to recover after a property loss because of the economic impact caused by the interruption of business operations during and after the event.
It’s common for business operations to be suspended temporarily after a property loss. Depending on the severity of the loss, a business may be forced to shut down for weeks, possibly months. Though revenue often stops, expenses continue. The inability to pay expenses (payroll, mortgage, suppliers, taxes, etc.) can turn a temporary suspension of business operations into a permanent shut down. Business interruption insurance can prevent this from happening.
Business Interruption, also known as Business Income, is a type of commercial insurance that protects against loss of income when a covered loss causes a business to reduce or suspend its operations. In the event of a covered loss, business interruption insurance will cover lost revenue and fixed expenses, like rent and utilities, during the suspension of operations. Extra expense coverage is also available to reimburse costs over and above normal operating expenses, like temporary relocation costs.
Business interruption coverage is triggered when there is direct physical damage to property that was caused by a covered peril. For example, if wind damage is covered under a commercial property insurance policy, there would be business interruption coverage if operations were suspended due to a windstorm. On the other hand, if wind damage is not covered, there would be no business interruption coverage.
To calculate a business interruption loss, insurance companies need to determine how much the business would have earned if the loss had not occurred. They may review and consider various financial documents, such as tax returns, bank statements, profit and loss statements and balance sheets, to establish the amount of a business interruption loss.
According to the Insurance Information Institute, a recent report found that the economic impact from business interruption is often much higher than the cost of physical damage. Business interruption losses now make up a much larger part of overall property losses than they did just ten years ago. The increasing interdependence among businesses locally and globally also means that business interruption losses are expected to increase in frequency and severity.
Businesses should consider adding business interruption coverage to their existing insurance program. Though many aspects of this coverage are relatively standard, there are some variations among insurers and policy forms. For example, some policies may provide Civil Authority coverage. Given the relative complexity of business interruption coverage, an experienced and reputable insurance agent should be consulted to help identify needs and evaluate options.
Please contact us to learn how business interruption insurance can protect your business.
If you’d like to subscribe to our weekly newsletters, please click here.