Business Interruption Insurance: Cost, Coverage & Providers

Business interruption insurance (BII), sometimes called business income insurance, pays for a business’s lost income if the owners have to pause operations because of a covered event like a fire. Most insurers include BII in their business owner’s policies (BOPs), which typically cost between $500 to $3,000 per year, depending on your industry.

How Business Interruption Insurance Works

Business income coverage is only triggered by the events covered by your commercial property insurance like fire, vandalism, burst pipes, and windstorms. Events not covered by your property insurance, such as earthquakes and floods, are not covered by your business interruption insurance. Moreover, many insurers specifically exclude pandemics from coverage. How insurers will treat the ongoing COVID-19 pandemic is unclear.

The most common way for small business owners to get business income insurance is in a business owner’s policy or commercial package policy. Some owners may opt to add business interruption as a rider to their commercial property policy. Standalone policies are rare, but you may be able to purchase one through surplus lines brokers.

What Business Interruption Insurance Covers

Business interruption insurance is often called business income insurance because it replaces the income your business would have earned if the damage to your property had not occurred. This type of insurance typically covers:

• Lost profits
• Employee’s wages
• Loan payments
• Temporary relocation costs
• Rent or mortgage payments
• Taxes
• The cost of training employees on new equipment
• Expenses over normal operating costs like renting equipment

Policies vary but, in general, your insurer pays for these losses if you have to close your business temporarily because of physical damage covered by your property insurance. For example, let’s say there’s a fire in your store. Fire is almost always covered by commercial property, so that policy pays for repairs. Unfortunately, the damage also makes it unsafe for people to enter. Business income insurance helps you cover your lost revenue, pay your employees and, sometimes, even temporarily pay for a new location.

What Business Interruption Insurance Doesn’t Cover

Business interruption insurance doesn’t pay for every cost your recovering business may incur. Therefore, it’s essential to keep these exclusions in mind when applying for your policy:

• Utility bills that are no longer being charged to you during the temporary closure of your business due to damage or destruction of your property
• Interruptions caused by a utility’s failure to provide services
• Income that isn’t documented in your financial records or that’s above the income cap on your policy; however, you want to keep this in mind as your business grows; you might only have $50,000 in revenues in year one but grow to $500,000 by year five
• Changes in market conditions or economic activity
• Losses caused by events excluded from your property insurance like floods and earthquakes

Business Income Insurance and COVID-19

Whether or not business income insurance covers losses due to COVID-19 is a complicated issue. Insurers point to policy language that requires “direct physical loss” to the business property. Moreover, many insurers specifically excluded viruses and diseases after a previous SARS outbreak.

Business owners, however, may have a few things working for them. First, courts have disagreed with insurers on strict interpretation of the policy language and tend to side with business owners when the line is murky. Additionally, many states are considering laws to force insurers to pay COVID-19 losses, including New York, New Jersey, Massachusetts, and Ohio. However, insurance organizations like the American Property Casualty Insurance Association and the National Association of Insurance Commissions have released statements opposing these laws.

If you believe you have a legitimate claim for business income coverage, then your first step should be to talk to your lawyer. Insurers and agents are required to deal with you in good faith, but they may not be up to date on all the issues regarding COVID-10 coverage. Your lawyer can review your policy to see if you have a case.

Who Needs Business Interruption Insurance?

Businesses that rely on physical locations and assets, such as equipment or machinery, should have business interruption insurance. For example, retail stores, hair salons, and restaurants all need their buildings to operate and generate revenue. Without business income insurance, many of these businesses would permanently shut down after a fire, hailstorm, or other covered event caused an interruption in their operations.

“Our research suggests that one in five small businesses would shut down within 30 days if sales stopped yet only 23% have business interruption insurance. This means any hiccup in cash flow can put the business at risk. In general, business owners aren’t properly insuring themselves against risks to revenue.”
—Brad Plothow, Vice President of Brand & Communications, Womply

Business Interruption Insurance Providers

The best insurance providers offer business income insurance tailored to the risks in your particular industry. A food truck operator has very different risks than a pie plate manufacturer or a carpenter. Consider this along with cost when deciding which carrier is best suited for your business.

The Hartford

The Hartford is one of the best small business insurance providers in the nation and a great choice for small business owners who want a BOP that is both reasonably priced and flexible. The business income protection found in its BOP offers several add-ons, including coverage for interruptions caused by off-premises utilities, computer viruses, and enforcement of a law or ordinance.

Nationwide

If your business is located in a place known for bad weather and power outages, then you may want to get your BII from Nationwide. Its basic business income coverage can be expanded to include a utility services endorsement that covers lost income and expenses if a covered event causes an outage like high winds taking down a power line. The coverage can have a time limit, or it can continue until power or water is restored.

CoverWallet

As an online insurance broker, CoverWallet is the right choice for business owners who want to comparison shop. The company gives business owners access to leading carriers through a single digital application. Most applicants see offers from multiple insurers and purchase coverage online. If they need help, a licensed professional can walk them through their options.

Hiscox

At-home business owners, particularly consultants, architects, and engineers, should consider getting a BOP with BII from Hiscox. Not only does Hiscox specialize in microbusinesses, but it offers a 5% discount to home-based businesses and another 5% discount when they bundle policies. Its BOP also includes coverage for computer interruption and data losses up to $10,000.

Travelers Insurance

Travelers Insurance is one of the largest providers of small business insurance in the nation and is an ideal option for companies looking for extra expense coverage. The company offers business income insurance with extra expense coverage to most of its target industries. Not every provider offers this extended protection, plus Travelers has an endorsement for mobile operations for personal care and pet businesses.

Cost of Business Income Insurance

Determining the cost of business interruption insurance is tricky because it’s typically sold as part of a package—most commonly in a business owner’s policy. BOPs usually cost between $500 and $3,000 per year but can be much more expensive for some businesses. Factors that impact your premium include business size, higher coverage limits, and geographic location.

Business Income Insurance Costs by Industry

*Foodservice estimate does not include businesses that sell alcohol.

Business Interruption Insurance Tips

Because the coverage comes in a BOP, most business owners won’t specifically apply for business interruption insurance. However, you do want to know about the coverage so that you know if it’s appropriate for your business.

1. Determine How Much Business Income Coverage You Need

Business interruption insurance has a coverage limit, which is the maximum amount your provider will pay if you have a claim. If you have a claim that exceeds your coverage limit, then you’re responsible for the difference. That said, you also don’t want to insure for an exorbitant amount because you’re going to have to prove your losses in a claim. Many carriers have BII worksheets to help determine how much coverage you need.

2. Understand the Period of Restoration

The period of restoration starts on the day of the loss, although there can be a 72-hour waiting period and ends when you should be operating either at the original location or a new one. Note the phrase “should be.” Insurers expect you to be up and running within a reasonable timeframe, and they only cover your lost income during this period, so you want to know what your insurer’s expectations are before you buy a policy.

3. Check If Business Income Insurance Is Included

Don’t assume that every business owner’s policy or property policy covers business interruptions. Even if it does include the coverage, ask to see what the minimum limits are and increase them if you need to.

You should also check how long your extra expenses are covered. Most business interruption policies cover this for one year on an ALS basis, which is the amount you would have earned without the interruption minus any money you did earn. A year may not be enough time to recover from a catastrophe.

Business Interruption Insurance FAQs

Because business interruption insurance is rarely sold as an independent insurance policy, it can be very confusing to understand what it is and where you find it. Below are some of the most common questions about business income insurance.

What is the difference between business income and extra expense?

Business income is your net income, which is your net profit or loss before income taxes minus your normal operating costs like payroll. Extra expenses are the costs a business incurs while trying to restore operations after an event causes it to shut down like fees to connect utilities at a temporary location.

What is actual loss sustained in business income insurance?

The ALS is the insurance term for a business’s true loss. The easiest way to understand ALS is to take the amount the business would have earned if there wasn’t an interruption and subtract any money it was able to earn during the period of restoration. Insurers are only obligated to pay the business’ actual loss sustained caused by an interruption up to the policy limit.

Bottom Line

Business interruption insurance, also known as business income insurance, is usually included in a business owner’s policy (BOP), or it can be added to a commercial property policy. However, small business owners who rely on their physical locations to generate income should confirm they have this coverage and possibly consider increasing it.

To be sure you have sufficient coverage from business owner’s insurance, speak with an insurance professional. The experts at The Hartford will help identify your exact coverage needs to find you the best insurance policy for the most affordable price. Get your free quote today.

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