It’s a nightmare no business owner wants to consider: Your doors are shut, your operations are suspended, and you’re facing an uncertain future. You might be wondering how this could even happen to your company. Well, think again. One in four businesses never reopens its doors following a catastrophic event. No, this isn’t a scare tactic. This is a reality many business owners face when they aren’t adequately prepared for the unexpected.
The reality is that your regular property insurance only covers the physical damages your property sustains. It doesn’t account for the lost income your business incurs while you repair, rebuild, and reopen. It also doesn’t cover your ongoing operating expenses and payroll when you have no income. This is where business interruption coverage becomes a lifesaver.
What Does Business Interruption Insurance Cover?
Business interruption insurance, or interruption coverage, acts as a financial cushion for your business when a covered loss forces you to shut down temporarily. This coverage pays for your ongoing operating expenses and payroll, as well as the profits you would have otherwise earned during that time. But that’s not all. Many interruption policies also include coverage for “extra expenses.”
These are the additional costs your business incurs when attempting to continue operations in some capacity during the restoration process. Renting a temporary location while your primary property is uninhabitable, paying overtime to employees working on clean-up and repair efforts, or expediting equipment repairs at a premium to reopen your doors sooner – all these scenarios can potentially be covered by your policy.
Our team of Insurance Producers at Bowthorpe & Associates have seen all too often how a business interruption claim can make or break a business’s chance at recovery.If you do not have this coverage, you will face hard choices between paying employees, rent, or repair costs.
Understanding Your Coverage Options
There are different types of business interruption coverage you can choose from. Basic business income coverage replaces the revenue you would have otherwise earned. So, if you were making an average of $50k per month before your loss, your policy would aim to replace that income during your restoration period.
Extra expense coverage is all about those additional costs you might face doing business in abnormal conditions. If your restaurant goes up in flames and you need to operate out of a food truck while rebuilding, your restaurant setup and equipment rental costs would fall under this coverage.
Contingent business interruption (CBI) coverage protects you if your suppliers or major clients experience their own covered losses. If your primary supplier’s warehouse floods and you can’t source key materials for three months, this coverage helps you recoup your losses. This coverage is often overlooked but recognizes how interdependent modern businesses are.
Civil authority coverage is triggered when a government action prevents access to your business. Mandatory evacuations or closure orders that bar you from accessing your property, even if undamaged, come under this coverage. Knowing Your Risks
Different businesses have different exposures. Natural disasters are an obvious risk, whether it’s wildfires, earthquakes, or severe storms. But there are other sources of business interruptions to consider: equipment failures, cyber-attacks, supply chain disruptions, or civil unrest.
Take a hard look at your operation and identify the risks you face. How reliant are you on a single physical location? Could you run your business remotely if necessary, or do you require a physical presence? How long would it take to exhaust your cash reserves if revenue ceased tomorrow? How many of your suppliers and customers are critical relationships whose disruption would significantly impact your business?
The recent past has taught us that business interruptions can come from unexpected quarters. The business that feels invulnerable may rely on a supply chain that traverses high-risk areas or have a technology stack that’s vulnerable to ransomware attacks. In fact, over 60% of small businesses fail within six months of a cyber-attack, often due to not having a financial buffer.
The Cost Factor
So, how much does business interruption insurance cost? Well, that is the million-dollar question, isn’t it? And the answer is: it depends. Your premium will be based on several factors: your industry, location, revenue, operating expenses, and the limits of coverage you choose. Naturally, higher-risk industries will pay more for this coverage. A manufacturer with high-value equipment will have a different pricing structure than a consulting firm with most operations conducted online.
The amount of coverage you need will also factor into your premium. Insurers will usually base this on your historical financial performance. They will require detailed records of your income and fixed expenses to ensure you are not under or over-insured. One common mistake businesses make is underestimating their coverage needs and only realizing it during a claim when the coverage is insufficient.
That is why it is beneficial to work with experienced insurance producers like Bowthorpe & Associates to help you accurately assess your coverage needs instead of blindly guessing. We’ve seen businesses underestimate their risks and businesses with coverage gaps that became costly during the claims process.
Do You Really Need This Coverage?
Now the million-dollar question: Do you really need this coverage? The answer, as with most insurance decisions, is not black and white. There are some tough questions you need to ask yourself:
How long could your business survive without revenue? Do you have enough cash reserves to cover six months of expenses if you were to generate zero income? Will your customers go to your competitors during a prolonged closure, or will they wait for you to reopen?
You also need to consider any contractual obligations you have that require this coverage. Some leases, loans, or client contracts will mandate you to carry business interruption coverage. If not, having this protection on your books is good practice and sends a message to investors, lenders, and partners that you are an operation that thinks beyond the short term.
The industry you’re in matters as well. Businesses that are heavily reliant on a physical location, inventory, or in-person services face higher business interruption risks than those whose operations are primarily digital or remote. A retail store or restaurant has different vulnerabilities than a software development company whose staff can easily work from home.
Don’t make this decision in isolation. Consult with knowledgeable insurance professionals who understand the coverage options and the unique challenges your industry faces. They can provide benchmarking data to show how similar businesses structure their coverage and help you identify vulnerabilities you may have missed.
The Verdict
Business interruption insurance is not just another insurance premium you write off as an expense. It’s the difference between a setback and a permanent closure, between weathering the storm and going out of business. It’s not pessimism to plan for the worst; it’s pragmatism. The businesses that last and thrive are not necessarily the ones that never experience a disaster. They are the ones that plan for adversity and have the resources to bounce back when the going gets tough. Your interruption coverage is a testament to that planning and foresight.
Frequently Asked Questions
How much does business interruption insurance cost?
Premiums can range from $500 to $3,000 per year on average, though it can be significantly higher for larger businesses with higher revenues and risks. Get customized quotes based on your specific situation rather than taking a one-size-fits-all number.
Will this insurance cover pandemic-related business closures?
Pandemic-related losses are typically excluded in standard business interruption policies unless an endorsement is added. Some insurers now offer pandemic coverage as an option given recent events, but it’s expensive and comes with significant limitations.
How long does it take to get paid on an interruption claim?
Business interruption coverage typically has a waiting period, often 48-72 hours after the incident, before coverage kicks in. The actual time to get paid will depend on the insurer and the specifics of your claim but expect it to take a few weeks as they verify your losses and coverage details.
Can I purchase business interruption insurance as a standalone policy?
You can, but it’s usually part of a comprehensive commercial property package. Standalone policies are available but may not be as cost-effective. Bundling with your property policy is more common and ensures better coordinated coverage.
What documentation do I need to file a business interruption claim?
Provide financial records showing your pre-loss income, your expenses, and evidence that a covered event caused your business interruption. Profit and loss statements, tax returns, payroll records, and lease agreements are all typical documentation you will need to provide to the insurance company to validate your loss. The better records you keep, the easier the process will be.