What is Business Interruption Insurance?
Business interruption insurance (or business income insurance) is a kind of insurance coverage that provides a business with funds that are meant to substitute for income that is lost due to the interruption of the business operations. Typically, this insurance covers most kinds of business expenses. For example, it would cover foreseeable lost profits based on the last month’s business records – profits that would have happened, if the business wasn’t interrupted by the intervening event. It also covers business taxes, payroll payments, any necessary relocation expenses, loan payments, etc. The insurance funds are meant to sustain the business and its operations until the business can recover from the interrupting event.
In order to receive the insurance funds, the insured would have to prove to the insurer that the business sustained losses as the result of the intervening event and not as a result of something else.
Do I need Business Interruption Insurance?
Business interruption insurance is not usually sold separately from other business insurance. Instead, it is usually sold as part of a larger business insurance package. Therefore, just as a business owner is strongly advised to purchase insurance covering fires and/or other disasters, so is he advised to include a business interruption insurance in the package. For example, if the business is forced to cease its operations due to a disastrous event, it is the business interruption insurance that will come into play to cover any losses that will stem from that interruption.
Business interruption insurance is suitable for all types of businesses. However, this kind of relief could be especially useful for smaller businesses that do not have large sums of money saved in the event of a halt in operations for an extended period of time. Basically, the business interruption insurance will cover all expenses that the business usually has until the business is able to resume its operations.
How to Calculate Business Interruption Insurance?
In order to calculate business interruption insurance, the business owner must calculate:
- Expected profits based on the most recent available business records.
- Expected costs of moving the business temporarily or running the business remotely.
- Any expected savings that the business can use during the interruption period.
- Expected payroll for the employees.
- Business loans.
- Business taxes.
How Long Does Business Interruption Insurance Last?
The duration of time that the business interruption insurance is covering the expenses and lost profits of a business is called “the restoration period”. This period begins when the business first begins to incur losses due to the interruption, and the period lasts until the business resumes its full operations. It is worth reviewing the exact terms of the specific business interruption insurance agreement, as different insurance companies start sending out payments after different waiting periods from the beginning of the interruption. These waiting periods can last for one or more days.
Business Interruption Insurance in the Coronavirus Pandemic
The Pandemic Risk Insurance Act of 2020 is currently being negotiated in Washington, DC. This law would “provide for a transparent system of shared public and private compensation for business interruption losses resulting from a pandemic or outbreak of communicable disease”. The Act would come into effect every time when industry losses would exceed $250 million. Insurance companies that chose to participate in the program would pay an annual premium for reinsurance coverage. They would also have a deductible. Losses greater than the individual insurance company’s deductible would be shared between the government and the insurance company. The government would pay 95%.
This bill comes, as more and more businesses are suing insurance companies over the business interruptions caused by the coronavirus.