Business interruption coverage is not a standalone product but is endorsed onto a business property or package policy. It is meant to provide remuneration in the event that a covered cause of loss creates a suspension or dramatic reduction in revenue due to property damage. The loss of income must occur in the “period of restoration” which is usually defined as the duration of time in which the damaged property is repaired, rebuilt or replaced. In filing a business interruption claim, a business must demonstrate that a covered peril gave rise to property damage that in turn caused a suspension of business activity. Because this type of insurance is endorsed onto a policy that includes multiple lines of coverage, it is important to understand which perils are covered as they relate to the business interruption portion of the policy by reviewing any proposed coverage with your broker.
When filing a business interruption claim, the insured must document the income that would have been earned if the covered event had not occurred. This often requires a forensic accountant to analyze past records to estimate income and expenses on an accrual basis. The process may also involve the work of a public adjustor. While these professionals help during the claim process, it is important for an insured to run through the exercise of completing business income worksheets prior to purchasing the product and again whenever there is significant growth. Several insurers provide business income calculators and can assist business owners through this process. It is also helpful at this point to ensure you have a disaster recovery and business continuity plan in place as insurers sometimes provide discounts for this. In addition, meticulous accounting protocols and records that are backed up can facilitate this process.
Business interruption coverage also pays for necessary expenses (extra expense) that avoid or mitigate the suspension of business operations during the restoration period. It also provides remuneration in the event that a civil authority bars access by the public to an insured property. There are additional coverages that a business can opt for that provide remuneration for extended business income, contingent business interruption and larger limits for loss of power off premises. Extended business income comes into play after the period of restoration is over and there continues to be a drop off in income compared to pre-loss revenue. Contingent business interruption covers “soft losses” that occur when a customer or supplier of a business experiences a loss that directly impacts the insured’s profitability. While limits are usually preset by insurers, it is possible to negotiate these if an upstream or downstream supplier or client is critical to a business’s operations. Finally, purchasing greater limits for offsite power loss coverage will maximize remuneration for loss of income that is causally related to offsite power failure.
In conclusion, ensure you are cognizant of all perils that have the potential to cause major interruption in business activity and the costs involved in restoring operations after a loss. The best time to do this is prior to purchasing coverage and by using a business income calculator. Once you decide how much risk you will transfer by purchasing insurance, be sure to avail yourself of insurers’ resources and professional advisors on a regular basis. By working with your broker to adjust limits and the scope of coverage as your business grows, you will ensure your business and employees can bounce back after a loss.