Business interruption insurance can help a business continue to pay its bills while it is closed or its income is down because of a disaster. The coverage can be valuable if your business has to continue paying rent, employee payroll and other expenses while it is closed and not earning income — if, for example, you own a restaurant that was shut down after the building was damaged by a fire or a hurricane. Here’s more information about what business interruption insurance is, how it works and what happened during COVID.
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What Does Business Interruption Insurance Cover?
Most businesses have insurance that covers physical damage to their building and property if their business is damaged by a fire or natural disaster. Some businesses also have business interruption insurance, also called business income insurance, which can cover lost income and continuing expenses while the business is closed or being repaired because of the disaster. About one-third of U.S. small businesses carry business interruption coverage, says Mark Friedlander, spokesman for the Insurance Information Institute.
Most policies cover the following expenses, says Friedlander:
— Lost net income (based on financial records).
— Mortgage, rent and lease payments.
— Loan payments.
— Routine bills.
— Employee payroll.
— Relocation expenses to a temporary location.
— Extra expenses such as rent for temporary space.
“It pays your bills that continue during the interruption and any profit you would have earned. For most businesses, the most important (and biggest) thing is to continue to pay your expenses, like payroll,” says Bill Wilson, an insurance consultant and author of the InsuranceCommentary.com blog and four books, including “When Words Collide: Resolving Insurance Coverage and Claims Disputes.”
Business interruption insurance is an optional add-on that can be included as part of a standard business insurance policy. It typically covers the business’ operating expenses in the event of a loss caused by physical damage to the building from a fire, some natural disasters or severe weather events such as a hurricane, windstorm, tornado, hailstorm, lightning or wildfire. Some policies also cover the losses if the business is closed because of theft or vandalism, riots and civil commotions, says Friedlander. “It also covers government-mandated closures for perils defined within the policy,” he says.
The coverage limits vary by policy. “Each insurance contract is written differently,” says Derek Ross, an independent insurance broker and president of Kulchin Ross Insurance Services in Tarzana, California. A typical policy covers the business’ losses while the premises are being rebuilt or restored to normal operations, for up to 12 months, and some can continue for up to 18 or 24 months, he says. Others cover up to a certain dollar limit or require you to pay co-insurance, which is a percentage of the costs. The policy may continue to make some payouts for 30 to 90 days after the business reopens while the business slowly ramps up to its pre-loss level of sales activity, according to Ross.
What Is Not Covereved by Business Interruption Insurance?
Friedlander says that business interruption insurance typically doesn’t cover the following:
— Broken items resulting from a covered event or loss (such as glass).
— Flood or earthquake damage, which are covered by separate policies.
— Undocumented income that is not listed on your businesses’ financial records.
— Airborne diseases such as the common cold, flu, viruses and communicable diseases such as COVID-19.
Business owners should make sure the policy limits are sufficient to cover their operations for more than a few days, says Friedlander. “After a major disaster, it can take more time than many people realize to get back in business.” Business interruption coverage usually has a restoration period, which is the length of time that a policy will help pay for lost income and extra expenses while the business is being restored. “Typically, there’s a 48- to 72-hour waiting period before the period of restoration kicks in,” he says.
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Are Losses From the Coronavirus Covered?
This ended up being the million-dollar question last year while businesses were closed for months because of COVID restrictions. The answer is generally no. It depends on the language in the contract, but most policies specifically exclude losses from pandemics. “Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses simultaneously,” says Friedlander. Insurers began adding pandemic and virus exclusions after the SARS outbreak in 2003, he says. He says that 83% of business interruption policies written in the U.S. include virus exclusions. Of the 17% that did not include a virus exclusion written in the policy, 98% included a “physical loss” requirement, says Friedlander. In that case, the policy would only pay out if the business were closed because of physical damages to the building or property.
Friedlander says that as of Nov. 30, 2020, more than 210,000 COVID-19 business interruption claims had been filed with private insurers in the U.S., mostly from small businesses. Of those claims, 85.5% were closed without payment, 1.7% were closed with a payment made to the policyholder and 12.8% remained open.
More than 1,500 lawsuits have been filed against insurers over claims for business interruption losses due to the pandemic since March 2020, says Friedlander. “Filings peaked in June 2020 and have been declining since, although new cases continue to be filed,” he says. In most cases, the lawsuits have been dismissed either because viruses were specifically excluded or the policy had a “physical loss” requirement. Wilson says that most courts have ruled that the presence of the COVID-19 does not constitute direct, physical loss or damage to property, which is a requirement to trigger coverage under most business interruption policies. “In addition, about two-thirds of the lawsuits involve virus exclusions and courts have upheld insurer motions to dismiss in the vast majority of cases,” he says.
Who Can Get Business Interruption Coverage?
Business interruption coverage is generally added to a company’s property insurance policy. “Business interruption coverage is typically tied to a physical retail location that serves customers,” says Friedlander. Small businesses may get a business owner’s policy that includes property, liability and business interruption coverage.
Wilson says that any organization or individual entrepreneur who has a profit and continuing expenses should consider buying business interruption insurance. Most business owner’s policies have a built-in option for business interruption coverage that usually covers a suspension of operations for up to 12 months without a dollar limit, he says. “It covers your loss of profit plus any expenses that continue following a loss until you can resume operations,” says Wilson.
What Should I Do If I Think My Business Might Qualify for a Claim?
Contact your insurance agent or company if you think you might qualify for a business interruption claim. Get a copy of your policy so you can see the details of the contract, the payout requirements and exclusions and how much coverage you have. Your agent or broker can help you file a claim and can also let you know about any other relief for policyholders, says Ross. “We don’t have the ability to approve or decline a claim, but we do work as the client’s advocate,” he says.
If you do file a claim, it’s important to gather evidence showing the loss of business income. “You want to document everything,” says Ross. “I recommend developing a timeline. When did your business flow start to decline? When were you forced to close? Did you make any large purchases of inventory before then?” Itemize your income and expenses over that time period, and also find out how it compares to the same time period over the past two or three years.
Keep the documentation even if the claim is denied. Having the records showing your business losses can help if you appeal the denial or if you qualify for other sources of assistance. For example, several government programs provided relief for businesses from COVID losses, such as the Paycheck Protection Program, economic injury disaster loan programs and grant programs for restaurants and bars.
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Update 04/23/21: This story was published at an earlier date and has been updated with new information.