Business interruption insurance could be the saving grace for your business if you find yourself in a position where you are unable to conduct business as usual for a period of time, but still need to pay employees and cover other business-related costs.
Statistics state that 25% of businesses that suffer a catastrophic loss (as defined by a total shutdown of 30 days or more) never reopen. Additionally, based on the data above, the businesses that do reopen ultimately close in a short period of time (3 to 5 years) after the catastrophic loss, with such failure being directly traceable and attributable to the catastrophic loss. Read on to learn more about the value of business interruption insurance and why you should consider it for your business:
What is Business Interruption Insurance?
Astoundingly, only 35% of all businesses in America have this all-important coverage according to the National Association of Insurance Commissioners. Business interruption insurance is basically an insurance policy that protects your business in the event you have to become non-operational for a time, which in turn leads to loss of income. It is usually part of a business owner’s policy or a part of a commercial policy package.
What Does Business Interruption Insurance Cover?
In most cases, businesses that rely heavily on their physical location, equipment or physical assets to generate their revenue, like manufacturers, restaurants, or retailers, should consider purchasing business interruption insurance coverage. It is important to consider the fact that equipment costs alone or repair costs after an incident are not the only need for income generation after a covered event.
When a business is interrupted due to a natural disaster, an individual incident or other, common business expenses like the following still have to be paid. And while business interruption doesn’t directly cover the items below, it replaces the income lost that would ultimately pay for these items:
- Taxes: As the saying goes, there are only two things in life that are certain, death and taxes, and businesses still owe taxes even if they are currently closed.
- Rent, Loan, or Mortgage Payments: Business owners can’t afford to make a bad situation worse by not staying current on their property payments.
- Staff Wages: Employees still have bills to pay so responsible employers will ensure they don’t go without income during an interruption.
It is difficult to quantify how impactful a business interruption can be on any given company. However, it is worth noting that small businesses, especially, are particularly vulnerable to the effects of an interruption. Just consider the aftereffects of even one event like a windstorm or fire and note the fact that it could take weeks or months to get a business operational once again. What would this kind of pause in income or revenue do to a business?
What Affects The Cost of Business Interruption Insurance?
The cost of a business interruption policy will differ for each company. The overall cost of a business's policy is based on the balance sheet or your profit & loss statement. While contemplating a business interruption loss, you fill out a worksheet that looks at all of your income and expenses. Then, you consider how long you could potentially be closed due to a catastrophic event and you apply that time period to the worksheet to determine the amount of interruption coverage you need. Carrier rates based on this information will determine the cost of the premium.
The amount of revenue a business also typically pulls in will also alter its coverage costs. After all, the policy is designed to compensate businesses for the revenue they lose during an interruption, so this number will impact the cost of a policy.
Bottom Line: Business Interruption Insurance is a Wise Investment
For most business owners, their business is their livelihood. And if the COVID-19 pandemic has taught us anything, is that nothing in life is certain, or guaranteed. This has allowed us to take time to reflect and think about the precautionary measures available to us to protect what we have worked so hard for. If business interruption coverage sounds like valuable protection for the success of your business, it’s because it is. Contact our team of commercial insurance experts today to start a conversation.
