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Understanding Business Interruption Insurance

Business interruption coverage is one of the most overlooked and underappreciated coverages in commercial insurance. However, this coverage can be one of the most utilized in a business owner’s time of need. Business interruption insurance, a form of time element insurance, can be the bridge between an insurance claim that sets a business back or spurs the business on to thrive in a time of upheaval. Business interruption insurance can be complicated, at times. When I meet with business owners, there are always a number of coverage aspects that get discussed. Below are some frequently asked questions of time element coverage that I often get asked by my clients:


Q: What exactly is business interruption insurance?

A: Business interruption insurance, also called business income insurance, is meant to insure your business’s loss of income.  Specifically, this loss of income results from a covered cause of loss from direct physical damage to a covered property. A claim can also be triggered in the event of denied access to your business by civil authority, such as hurricane damage to surrounding areas.


Q: What is extra expense coverage and how is it associated with business interruption insurance?

A: In the event of a covered claim, businesses often sustain losses that go far beyond lost sales, lost rental income, and other forms of revenue. Sometimes a large factor in business interruption is the extra expense portion of coverage. Extra expenses are defined as any aspect of continuing expenses in excess of normal operating expenses which the business needs to pay in order to sustain a normal day to day operation or reduce the impact of a business interruption. This could include expenses such as the rental of a temporary location, the cost to move to a temporary location, utility costs at a temporary location, overtime and bonuses paid to get the business back up and running quickly.  Simply put, they are expenses that would not have normally incurred but now the business has to pay in order to support normal day to day operations.


Q: How much business interruption coverage is needed?

A: In some ways there is no “perfect” science to calculating what a business could need in a Business Interruption limit. It can vary based on the business industry or different philosophies from various business owners. The best way to calculate a limit that an owner can feel comfortable with is by completing a business income worksheet. Business income worksheets can often be confusing and overwhelming to complete; however, they can be extremely beneficial for both the client and the underwriting company in establishing a proper limit.  These worksheets analyze business gross sales, recurring expenses and the trends from year to year, as well as an estimation of the potential business down time might face depending on the type of claim. Again, while it is by no means an iron clad way of protecting a business from a business interruption loss, these worksheets are an excellent tool to quantify the potential solution if a claim were to occur.


Q: What can trigger a business interruption claim?

A: A business must sustain direct physical damage from a covered cause of loss. This damage has to occur at a covered property, cause an interruption of normal day to day business operations as well as create a loss of earnings to the business. A claim can also be triggered in the event of denied access to the business by civil authority, such as damage to surrounding areas due to a hurricane.


Q: What if a business is dependent on other operations or other vendors to sustain day to day operations.

A: This could possibly be the least understood or asked about aspect of this coverage, but potentially the most important depending on business operations. Many businesses are reliant on their suppliers, a significant customer or in the case of a retail establishment, an anchor store.  In these situations, it is highly possible for the business to sustain no “direct physical damage” but experience a major loss of income claim due to a supplier, customer or dependent property being down. In this instance it is advisable for these types of businesses to consider purchasing contingent business interruption insurance.   Contingent business Interruption insurance has the same basic requirements as ordinary business interruption insurance except the property that suffers the direct physical damage must be that of a supplier, customer or is considered a dependent property.


Q: Why is my deductible for this coverage listed out in hours on my policy?

A: Because business interruption is a form of time element coverage, many insurance carriers require a time frame deductible rather than a dollar amount. Because business interruption and extra expense claims can be hard to quantify, especially at the outset of a claim, you often see a time frame deductible in the range of 48-72 hours. This simply means that responsibility will fall to the business for any lost profit, continuing expenses, or resulting expenses from a covered cause of loss within the time frame listed on the policy. If a business is not able to get back to “full capacity” in any of those areas or has ongoing lost time expenses resulting from the claim, then the insurance company will pick up coverage from that time frame forward. Many business owners don’t know exactly what their loss of income is until days and weeks after a claim has occurred. So, a time frame deductible allows both the insurer and the business owner to know when each of their responsibilities for payment begins and ends.


Q: If I have a business interruption claim, what information will I have to provide an adjuster?

A: The process of valuing a business interruption loss can be complex. Sales projections are never certain in any business. This makes it almost impossible to know just how much income a business has lost in comparison to expected income if the loss never occurred. In order to justify a loss, adjusters will ask to see business sales projections for the time when operations were down. Also, they will inquire aboaut the business sales at that point in time for the prior year. If a business normally has seasonal fluctuations, that information will also be taken into consideration.  While operating expenses are more straightforward and easier to quantify, the added aspect of extra expense can be a moving target. All documentation related to these areas are fair game when it comes to adjusting a business interruption loss. The goal for any claim adjustment and settlement process is for the insurance carrier and the business to collaborate and determine an agreeable, equitable value.


In some ways, we have barely scratched the surface of this complicated yet vital form of insurance coverage.  There are additional intricacies of this coverage that can help businesses calculate an appropriate business interruption limit and structure. Business interruption coverage could be the difference between a company’s devastating set back of weeks, months, and even years, or the situation where a company survives and even thrives in the face of complicated and confusing times. While we all hope that a business never has to utilize this insurance coverage, don’t let the threat of a business interruption be a hindrance to your business’s progress. Use it for the unique security that it can provide you in the face of challenges.


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