Business interruption insurance is a standard tool in a business’s risk management toolbox. But will your policy cover business income loss due to the global COVID-19 pandemic? 

This is the first of two articles on business interruption insurance. This article focuses on the basics, and the follow-up is specific to COVID-19.

First, what is business interruption insurance?

Business interruption insurance is also known as business income insurance. Business interruption service helps replace lost revenue while a business is closed due to a covered loss. Coverage is typically tied to your commercial property insurance or business owner’s policy. 

Many business interruption clauses read as follows (emphasis added):

“We will pay for the actual loss of business income you sustain due to the necessary suspension of your operations during the period of restoration. The suspension must be caused by the direct physical loss, damage, or destruction to insured real or personal property. The loss or damage must be caused by or result from a covered cause of loss.”

How is business income defined?

Business income generally has two elements:

  1. Net income that would have been earned if an interruption hadn’t occurred.
  2. Normal operating expenses that would have been incurred despite the interruption. These may include payroll, rent or mortgage payments, taxes, even relocation costs if you need to temporarily move your business operations during the restoration period. 

What is considered a necessary suspension of operations?

A necessary suspension of operations means you are unable to conduct business due to the loss. 

What is a restoration period?

The restoration period is the length of time it takes to recover from the interruption to the point where business can resume. This typically includes rebuilding, repairing, or replacing damaged or destroyed property. 

Some policies have a waiting period of 24 to 48 hours. To be covered, the interruption and/or restoration time must exceed the length of the waiting period. However, the expiration of the policy does not extinguish the restoration period as long as the interruption occurred while the policy was still active. 

What is a covered cause of loss?

  1. You must experience an actual loss as a direct physical loss or damage to insured real or personal property not otherwise excluded from your policy. 
  2. The loss is specific to a location or type of interruption experienced. If you have multiple business locations, you can only file the loss claim for the specific location where the interruption and loss of business income occurred. 
  3. The loss is subject to the policy limit or sublimit.

Some examples of possible losses include damages due to:

  • Fire.
  • Flooding.
  • Wind or lightning. 
  • Theft.
  • Vandalism.

Carefully read through your policy and take note of any exclusions, limits, or sublimits.  

Are there additional endorsements available for business interruption coverage?

Yes. Some policies include, or are available for an additional fee, “extensions of coverage.” These extensions may include:

Service interruption protects your business from losses caused by interruptions in electrical, gas, water, telephone, or internet service. Some common exclusions include utility interruptions caused by earthquakes, or a limit on the distance that the source disruption occurs from your place of business.  

Contingent business interruption protects you in the event that a primary supplier, partner, or customer affects your ability to run your business. An example of contingent business interruption is if a tornado hits and destroys the only warehouse of widgets, which are essential to make your business’s gizmos. 

Attraction property, or sometimes called leader property, provides a benefit if a nearby business (legally independent from your own business) is damaged or destroyed, but you depend on that business to attract customers to your own. For instance, a water park draws tens of thousands of visitors to your small town and your ice cream shop, but the water park discovers their water supply is contaminated and must close while they sanitize the park and install special filters to remediate the water. 

Civil or military authority coverage protects your business in a situation where a government authority prohibits you from running your business due to a physical loss. An example of civil authority extension is if the building inspector condemned the property due to a structural deficiency caused by a storm. 

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