When a business is affected by a disaster, the effects can last long after the disaster itself. During the recovery period, operations may need to be slowed or altogether stopped. This can lead to a significant decrease in revenue, which can have a multitude of effects. Business interruption insurance helps businesses survive revenue decreases that are caused by covered interruptions in their regular operations.
Business interruption insurance is a highly unique form of commercial insurance. Rather than protecting physical property from perils or companies from liability risks, this is one of the few insurance coverages that compensates businesses for revenue decreases.
There are many businesses that may want business interruption insurance, and the list of businesses that can benefit from this coverage isn’t limited to any one industry or single type of company. Just a few types of business that might consider a business income policy include:
In general, any business that would struggle to pay its bills if it experienced a sustained revenue loss may need business income insurance.
Businesses that have sizeable cash reserves in savings may be tempted to forgo business interruption insurance so they can save on annual premiums. Self-insuring against revenue decreases has a disadvantage, though.
Self-insuring require businesses to maintain high levels of savings. While it’s a good idea to have some money in savings, having to keep too much in savings can prevent a business from taking advantage of potential opportunities that would lead to growth.
With a business income policy, businesses can free up some of the capital that they would otherwise want to keep in savings. The freed money can then be used to invest in facility upgrades, staff training, new employees or other strategic moves that will help the business grow.
Generally speaking, the perils that business interruption policies offer coverage for are similar to those that commercial property insurance policies cover. The exact coverages of any one policy can vary, but most policies offer coverage for perils like fires, thefts and windstorms.
There is one risk that business interruption policies don’t cover -- poor decisions. Errors in decision making and competition from other companies isn’t covered, for policies’ coverages are limited to uncontrollable and unexpected disasters. That doesn’t include industry changes or decisions that impact profitability.
Insurers offer a few different kinds of business interruption policies. Some common options include:
(Each of these types of policies usually has limits on how long it will provide benefits.)
As stated in the previous section, contingent business interruption coverage is designed to cover situations where an insured loses business income as a result of loss, damage, or destruction of property owned by direct suppliers, or, in the instance where there is loss, damage, or destruction of property of the direct receiver of goods or services from the insured.
It is important to note that both the supplier and the receiver in these scenarios have to be "direct" suppliers or receivers. This is crucial in understanding the policy because in a multi-tiered supply chain, the loss of business income due to loss, damage, or destruction of property owned by others may occur to a business that is in the chain, but not directly to the insured. Therefore, there may be a gap in coverage for the insured.
To get help finding insurance coverage for potential revenue decreases, businesses should talk with an independent insurance agent who has expertise in business interruption insurance. A knowledgeable agent will have the expertise needed to make informed coverage recommendations and make sure an insurer’s policy provides all the protection a business needs. Being independent, they’ll be free to recommend the best policy no matter what insurer offers that policy.