What does business interruption insurance cover?

What business interruption insurance pays for

The standard business income form from the Insurance Services Office (ISO), which many insurers use or adapt, defines business income as the net income you would have earned plus the continuing normal operating expenses you still incur, including payroll. It also pays extra expense: costs you would not have had without the damage, such as renting a temporary space or paying for expedited shipping on replacement inventory.

In practice, Insureon lists these as the costs the coverage helps pay while you are closed:

• Lost income, calculated from your financial records.
• Rent, lease and mortgage payments on your space and leased equipment.
• Payroll, so you can keep your staff. Insureon says most policies cover up to one year of pay for each employee.
• Loan payments, including SBA loans.
• Taxes that come due while revenue has stopped.
• Relocation costs and rent at a temporary location.

What has to happen before it pays

The trigger is physical damage. Under the ISO form, the suspension of your operations must be caused by direct physical loss or damage at your described premises from a covered cause of loss, such as fire, wind or theft. The Insurance Information Institute has made the same point: business interruption policies generally require direct physical damage to the business’s property.

Payments run for the period of restoration, which ends when the damaged property should be repaired or replaced with reasonable speed, or when you resume business at a new permanent location. The policy expiring does not cut that period short, but under the ISO form it does not include extra time caused by enforcing building codes or other ordinances.

The standard form also builds in several time limits worth knowing before you file a claim.

What business interruption insurance does not cover

Most denied claims come back to the physical-damage requirement or a specific exclusion. Common gaps include:

• Slow seasons, lost customers or an economic downturn with no physical damage to your property.
• Viruses and pandemics. ISO introduced a virus and bacteria exclusion in 2006, and the NAIC notes many insurers have since added similar language.
• Flood. The Hartford notes flood damage requires a separate policy, so a flood closure is generally not covered under a standard property policy or BOP.
• Power, water or internet outages caused by damage away from your premises, unless you add an off-premises utility endorsement.
• Income you cannot document. The Hartford excludes income not shown in your financial records.
• Lost sales after reopening caused by poor conditions in your area, which the ISO form excludes from extended business income.

Endorsements that close the common gaps

Several gaps can be narrowed for an added premium. Availability and pricing vary by insurer.

• Off-premises utility services: covers income lost when damage to a utility’s property cuts your power, water or communications. The Hartford offers this as an extension.
• Extended period of indemnity: an optional coverage in the ISO form that replaces the 60-day recovery window with a longer period, for businesses whose customers take months to return.
• Dependent properties, or contingent business interruption: covers income lost when physical damage shuts down a key supplier or customer. The NAIC notes these policies may still require property damage to trigger coverage.
• Shorter waiting period: the ISO endorsement CP 15 56 can reduce the 72-hour waiting period, and The Hartford advertises a zero-hour waiting period on its business income coverage.

How it is sold and what it costs

Insureon says business interruption coverage is added to a commercial property policy or business owner’s policy rather than sold as a standalone policy. The NAIC notes it is typically bundled into a BOP and estimates that only 30% to 40% of small business owners carry it, while citing FEMA’s estimate that about 25% of businesses fail to reopen after a disaster.

Because it is bundled, there is rarely a separate price to compare. Insureon reports its small-business customers pay a median of about $83 a month for a BOP, with annual premiums from around $400 to over $6,000; 25% pay less than $50 a month. Your share for business income depends on revenue, location, property value, number of employees, industry, claims history, limits and deductible.

How to choose a limit and avoid a coinsurance penalty

Some policies set a dollar limit for business income; others, including some BOPs, pay actual loss sustained for up to 12 months with no dollar limit. If yours has a dollar limit and a coinsurance percentage, the ISO form reduces your claim when the limit is lower than that percentage of your next 12 months of net income plus operating expenses.

As an illustration with made-up numbers: if your next 12 months of net income and operating expenses total $400,000 and your coinsurance is 50%, you need a $200,000 limit. With only $150,000, the insurer pays 75% of each loss, and you absorb the rest.

To set a limit you can rely on, work through these steps. A broker such as Florin can compare how several insurers handle limits, waiting periods and endorsements for your business.

• Estimate how long a rebuild would realistically take, including permits and equipment lead times, not just construction.
• Base the limit on your current budget, and update it at renewal if revenue or payroll has grown.
• Ask whether your policy uses a dollar limit, a coinsurance percentage or actual loss sustained.
• Keep tax returns, profit and loss statements and payroll records backed up off-site, since your claim is calculated from them.