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Business Interruption Insurance - a complete guide
Introduction to Business Interruption Insurance.
We all bear losses at some point of time in our lives and sometimes the business gets totally shutdown with the closure of all operations. In case of some disasters also, there is complete closure of business and its operations and it becomes difficult to retain market positions and almost impossible to pay staff salaries. In this type of disaster Business Interruption Insurance comes into existence.
Before discussing the types, inclusion, exclusions, advantages and disadvantages of Business Interruption Insurance, let us first understand what is Business Interruption Insurance?
What is Business Interruption Insurance.
Business Interruption Insurance is a type of insurance that covers the loss of income that a business suffers after a disaster. This is a type of extra provision that is applicable to all types of businesses. It provides the additional coverage to the business by covering the profits that would have been earned if the loss would not have been occurred. Business Interruption Insurance cannot be purchased as a stand-alone policy but can be added on to the business property insurance or comprehensive package policy. Business Interruption Insurance is also known as Business Income Insurance. To better understand what Business Interruption Insurance is, let us elaborate the term with meaning.
Inclusions under Business Interruption Insurance.
i) Business Interruption Insurance covers the actual loss sustained by your business as a result of direct physical damage to the property by a hazard not excluded from the policy. In this your business sustains a business income loss, the business interruption insurance will cover the amount of loss actually occurred and not exceeding the amount of the limit of the policy.
ii) Business Interruption Insurance includes the net income which is Net Profit or Loss before income tax that would have been earned or incurred by your business and continue operating expenses incurred including payrolls to the employees.
iii) You are liable for the loss of the business income only during the period of restoration which means the length of time required to rebuild, repair or replace the damaged property. The period of restoration begins when the physical damage occurs and comes to an end when the property gets repaired and replaced from all damages that had occurred. Even if the policy expires before the period of restoration ends, the Business Interruption Insurance will provide the coverage for the duration of the period of restoration.
iv) Business Interruption Insurance provides coverage for “Additional Coverage”. For example “Extra Expense” which is defined as the necessary expense incurred by you during the period of restoration. The Business Interruption Insurance will not pay any part of the expense that is more than the claim itself.
v) The Business Interruption Insurance Policy include “Extensions of Coverage” where your policy will ensure you against business income losses resulting from the following:
a) Service Interruption: Service interruption provides coverage in case f direct physical loss, damage or destruction to electrical, water, steam, gas or destruction at the location of the utility or service to the hazard covered under the policy. Following are the exclusion from the policy:
- Limitations due to distances.
- Destruction caused by natural calamity like earthquake.
- Overhead transmission and distribution lines.
b) Contingent Business Interruption: Contingent Business Interruption Coverage is designed to cover a business income loss resulting from loss, damage or destruction of property by others which include the following:
- Direct suppliers of goods and services to you.
- Direct receivers of goods and services manufactured by you.
The Contingent Business Interruption creates gap in coverage in case of multi-tiered supply chains because of the direct relationship between suppliers and receivers. This coverage is typically added to the property of insurance policy on the request of the insured.
c) Leader Property: Leader Property policy provides coverage to your for direct physical loss, damage or destruction to property not owned or operated by you and which is located within the stated distance to your property and which attracts business to you. For example, any kind of amusement park near your property, a mall, a casino, or a destination retail store will surely attract business to your property.
d) Interruption by Civil and Military Coverage: Interruption by Civil and Military coverage is provided for the actual loss sustained by you during the length of time when the access to such property is specifically prohibited by order or civil or military authority as a direct result of damage as insured to covered property on the described property adjacent to the property described in the policy.
Why do you need Business Interruption Insurance?
Business Interruption Insurance covers the loss of income that you suffer after a disaster. The income loss may be due to disaster related closing of the practice or e-building process. The intention of Business Interruption Insurance is to restore your work to the same financial position as if the loss had not occurred. To investigate if the claims are linked to material damage or damage to property, a loss adjuster may be appointed who investigate the circumstances of the claim and the extent of the loss. The role adjuster advises about the relevant documentation required during filing of the claim for the loss.
Most large businesses carry Business Interruption Insurance policy because they have their operations spread across the country. Business Interruption Insurance is a wise way to protect income. It is essential to examine your risks when you are trying to determine whether to increase coverage or not. Following are the tips to determine whether Business Interruption Insurance is needed by you or not:
- Does your current insurance policy have a very high deductible? If yes, Business Interruption Insurance is not a good option to be taken.
- Do you have enough revenue in the bank for prolonged closure? If you have enough revenue in your bank in case of prolonged closure, you do not need Business Interruption Insurance policy.
- You should know the amount of how much risk you are comfortable with.
- You should know how much insurance do you need.
- You should check for weak points that could hurt your business.
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How much coverage is needed?
Amounts of coverage are unique to all business types. To estimate how much coverage is needed in case of restoration of your business depends on the following:
a) How much amount of revenue your company generates?
b) How much money would be required to pay the bills if operations of your business are shut down for 3 days?
c) How much money would be required to pay the bills if the operations of your business are shut for 2 weeks? Or 2 months?
d) Take a closer look at recovery time the companies in your area experienced when their company’s operations were shut down.
e) Consider, if you want to keep your employees on payroll while your operations are closed.
f) Talk to an independent agent and know how the whole procedure of Business Interruption Insurance works.
What necessary step should be taken in the event of loss?
1) First and foremost, notify the police and file a formal complaint about the loss that had happened.
2) Secondly, you should give an immediate notice of the direct physical damage with the description of property involved in the loss.
3) Thirdly, you should give the description of what, when, how and where the direct physical damage of property has occurred.
4) Forth, you should take all necessary steps to protect your property from further damage. And start getting it repaired as much as you can. Keep all the bills of expenses incurred and records of expenses incurred in repairs should be presented at the time of settling claims.
5) Permit the inspection of the property, books and records.
6) Submit proofs with photographs of loss incurred.
7) Co-operate with the investigation of the claim.
How to obtain Business Interruption Insurance?
Business Interruption Insurance coverage cannot be purchased as a standalone policy. It can only be obtained as a part of the following types of policies:
1) Business Owners Insurance Policy: Business owners insurance policy is intended for small businesses. This policy’s package includes:
a) Property insurance coverage.
b) Liability insurance coverage.
c) Business Interruption Insurance coverage.
2) Commercial Package Policy: Commercial Package Policy is a flexible policy that can be customized with a range of options including Business Interruption Insurance coverage.
3) Commercial Property Insurance: You can always add endorsement to commercial property insurance that will extend the policy’s coverage to Business Interruption Insurance.
Disadvantages of Business Interruption Insurance
Following are some disadvantages of Business Interruption Insurance:
1) If you obtain Business Interruption Insurance as a part of commercial property insurance policy, the coverage will only extend to events outlined in the commercial property policy. Suppose, if your property insurance does not cover damage from wind, you will not be able to receive Business Interruption Insurance if your business gets destroyed from windstorm.
2) There are time limits on Business Interruption Insurance coverage. So you should always discuss limitations and exceptions in consideration of time with your insurer.
Advantages of Business Interruption Insurance.
1) It helps the owner of the business to continue operations of the business which helps the owner to retain its customers and market position.
2) It gives coverage for business’s continuing expenses and profits while the business is not able to operate.
3) The owner of the business is able to retain its employees by continuing to pay salaries and benefits of their staff while recovering from losses.
4) It gives the insurance company an incentive to promptly pay to have damages repaired.
Following are some questions that an insured should consider while preparing business interruption claim occurring in times of economic downturn:
1) Is there any change in insured’s products and services in the market?
Current market conditions may have changed materially with the change in trend, while the company’s trends have been going in a similar direction prior to the loss.
2) Does the insured have any contracts that help to support the forecasted level of sales despite of changes in the economy?
For example, we take the case of a distributor, if the distributor can get the written purchase commitments from customers prior to the loss, can support in forecasting the levels of sales even if the competitor’s market is falling.
3) What is better in the products and services of the insured than other in the market so that his sales have been less affected by the downturn of the economy?
This can be done by looking at how the sale of the insured products or services is compared to its competitors prior to the loss.
4) Are there any products or services introduced by the insured in the market for which there is no significant sales history that exists?
This will require looking at how all similar products or services are performing in the current market and then a forecast should be made around those taking unique advantages into account like marketing, promotion, contracts, and advance orders that can be documented.
5) Are there any changes made to operations or facilities by the insured that would have supported increased sales despite the downturn in the economy?
Let us understand it with an example, a recent addition of a new machinery or process at a manufacturer could support a forecast of increased revenue.
6) Are there any significant changes in the competitive landscape as a result of the downturn in the economy?
For example, challenging economic conditions may cause a major competitor to go out of business which creates a positive impact on insured’s business.
7) Are there any significant changes in the supply chain or commodity prices to economic conditions that could impact the insured’s price structure necessitating an increase in sales price?
For example, economic conditions caused a metal fabricator that provided key components to a manufacturing company to close all operations of his business. The manufacturer will now need an alternate supplier which will increase the cost of material by 20 percent, the manufacturer in turn will need to increase the sale price of the product in order to maintain normal product margin. The result in this case is, in the insured’s specific market the resultant increase in sales price creates decrease in volume of units sold.