Ensuring your business can weather the unexpected is key to ensuring its long-term growth and survival. Unlike regular business insurance, which doesn't cover income loss due to operational disruptions, business interruption insurance offers a critical safety net to help your business endure and recover from disruptions such as fire, vandalism, machine breakdowns or property damage.
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- What is business interruption Insurance?
- Types of business interruption
- What business interruption insurance covers
- What business interruption insurance does not cover
1. What is business interruption insurance?
Unlike standard business insurance, which usually covers some types of damage to a business's property, workers' compensation or liability claims, business interruption insurance covers operating expenses, lost net income, and other financial losses that occur because of an unexpected disruption.
This can include damage to physical properties due to fires, vandalism, or major equipment failures that cause a significant impact on your business operations. For instance, should lighting strike your storage unit, this insurance aids in recouping the income lost during the period it takes to make repairs.
Business interruption insurance can be part of a standard business policy or may need to be added as an endorsement or addition to an insurance policy.
2. Types of business interruption coverage
Business income coverage
This form of coverage helps to replace lost income and assists your business's ability to pay ongoing expenses in the event your business is forced to close temporarily due to a covered loss. It can compensate for missed profits, payroll, rent, taxes, and other operating costs.
Extra expense coverage
Extra expense coverage helps to cover additional costs your company needs to pay to avoid a shutdown. This may include situations such as renting temporary office space or equipment, paying overtime or covering the cost of temporary transportation or relocation.
Contingent business interruption coverage
What happens when one of your suppliers suffers from an expected disaster? This coverage protects your company if a supplier or business partner suffers from a loss or incident that disrupts your business. For example, if a fire or global transport issue stops your supplier from sending goods to you, this insurance might help cover the money you lose.
Civil authority coverage
Civil authority insurance works to safeguard your business against losses resulting from compulsory shutdowns or restrictions imposed by governmental bodies — if they cause your business to suffer losses or halt your operations. For instance, should a government evacuation mandate or a curfew by local officials involve closing your business this type of coverage could provide financial compensation for the income you lose.
3. What business interruption insurance covers
Most business interruption insurance covers the following operational elements, however it is critical to confirm this with your provider before signing up.
Profits
This will usually be based on the prior month's performance. In the instance you require a payout, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
Fixed costs
Fixed costs refer to the recurring expenses that your business must pay, regardless of its production or sales. This may include rent or mortgage payments for business premises, salaries for employees who are under contract, utility bills, insurance premiums, and any other costs that remain constant each month.
Temporary location
Should a disaster cause your primary business location to become, your business interruption insurance covers the expenses associated with setting up and operating from a temporary location. This can include the costs of renting a new space, moving and setting up equipment, and operating expenses.
Commission and training cost
Business interruption insurance may cover replacing machinery and retraining personnel on how to use the new machinery.
Extra expenses
Business interruption insurance will provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating while the business gets back on track.
Employee wages
This coverage can help businesses cover payroll, due to unforeseen events.
Taxes
Even when a disaster strikes, businesses are still required to pay taxes, Tax coverage can ensure a business can pay their taxes on time and avoid penalties.
Loan payments
Loan payments are often due monthly. Business interruption coverage can help a business make those payments even when they are not generating income.
4. What business interruption insurance does not cover
What your business interruption insurance will and won't cover will be determined by your choice of provider. However, in general, you will not be covered for:
- Broken items resulting from a covered event or loss (such as glass).
- Flood or earthquake damage, if they are covered by a separate policy.
- Any income that’s not listed on your business's financial records
- Utilities
- Pandemics, viruses, or communicable diseases (such as COVID-19)
What business interruption insurance will and will not cover has come under particular security and focus since the impact COVID-19 had on businesses and shutdowns. It is therefore important to communicate with your insurance provider to determine exactly what events are covered under your current insurance and plan accordingly.
To learn more about why business insurance is so important for tradies, read our insurance guide.
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This article is not intended as financial or policy advice. Always check with your insurance provider before making any changes to your insurance or policies.
