An oft overlooked part of home insurance is Additional Living Expenses – the part of the policy that covers hotel costs (among other things) if you have a claim and are unable to live in your home during the repairs. This coverage is meant to allow you to maintain your standard of living even though your home is uninhabitable. But what if it’s your business that catches on fire, not your home?
As a business-owner, your livelihood depends on your company being operational. If there is a fire at your premises, a standard commercial insurance policy would cover the costs to repair the damage, but not the revenue you lose as a result of closing the business during repairs.
Fret not – there’s coverage for that!
Business Interruption insurance is designed to cover your lost income when your operations are interrupted due to insured damage (e.g. flooded retail space).
There are four types of Business Interruption insurance:
- Gross Earning Form – coverage is provided until the insured property is repaired or replaced. As soon as operations resume, the coverage ends.
- Profits Form – coverage is provided until your business returns to its normal, pre-interruption level, factoring in lost customers and employees
- Extra Expense – coverage is provided only for expenses necessary to continue operating the business at its original or temporary location until repairs are complete. (This would be appropriate for businesses that would retain their clients and maintain revenue following a claim, like a law firm, but where there could be significant costs of setting up a temporary location to enable operations to continue.)
- Gross Rents – coverage is provided for the loss of rental income until repairs are complete. (This would be chosen if you owned a commercial building, out of which other businesses operated. When the building is being repaired, you lose the income from your tenants’ rent.)
In addition to lost income, there are many additional expenses incurred because of the damage are also covered, such as:
- Employee payroll or outsourcing costs;
- Taxes and loan payments (which do not stop even if your business is not fully operational);
- Rent at another location, if work must continue;
- The moving costs to get there; and
- And the cost of utilities at that new location;
- Advertising expenses (which may be especially important if you are operating out of temporary location); and
- Expenses that exceed normal operating costs, to enable the business to continue during the repair period.
There are also optional coverage extensions that can be purchased:
- Contingent Business Interruption coverage can be added to cover your business’s lost income due damage or destruction of others’ This means that if a supplier, client, or other business with a direct relationship to your business suffers damage that disrupts your service, you would have coverage.
- Off Premises Utilities coverage is utilized when the interruption to business operations is caused by damage to the public utility plants/poles/towers/lines. (The damage to the utility system must be caused by something, like windstorm, that would be covered if it had damaged the business premises directly instead of the utilities.)
- If you own the premises and have tenants that are displaced by the damage, Rental Income coverage would pay for lost rents.
- Interruption by Civil Authority extends coverage to lost earnings when access to the premises is prohibited by a civil authority.
There are a couple important things to be aware of with business interruption insurance, and the coverage extensions.
Firstly, coverage only applies when the damage to the building is covered. (If, for instance, you are unable to continue operations due to earthquake damage, but your business property insurance does not include coverage for earthquake damage, business interruption coverage would not apply.)
Secondly, there is a waiting period before a claim may be made. Typically, service must be interrupted for 48-72 hours before coverage would apply. (Sorry, no, you cannot make a claim every time your power goes out for a couple hours, despite the lost productivity.)
Common exclusions in business interruption insurance include lost income caused by:
- Leadership decisions;
- Marketplace or economic fluctuation; and
- Strikes/job action.
If the interruption to operations is caused by a mechanical failure, you will need to have Equipment Breakdown Insurance in place.
The premium for business interruption insurance varies by company type, size, and location, as well as the number of coverage extensions you choose.
A Business Interruption worksheet can be completed to review your exposure and select an adequate limit of coverage. A new worksheet should be completed each year at the time of the policy renewal to confirm the coverage limits grow with your business
Wondering whether business interruption insurance is right for your company? If damage to your business premises would result in lost income and additional expenses, the answer is probably “yes.” To help with the decision, and build a coverage package for your unique business, talk to your commercial insurance broker.
For tips on creating a continuity plan for your business, click here.
Morgan Thomas, BA (Dtn.)
Project Management & Customer Experience Coordinator