For large and small businesses alike, any incidents or disasters that may cause your company to cease operations, even temporarily, can be incredibly costly. Business Income Insurance or Business Interruption Insurance is an important coverage that provides you with the financial resources you’ll need to ride out any disruptions to your revenue and cash flow.

What is Business Income Insurance?

Business Income Insurance provides coverage for loss of income and operating expenses if your business must temporarily close due to property damage. Also known as Business Interruption Insurance, Business Income Insurance will provide funds to address your lost income or revenue while your business is recovering from the damage that was directly caused by a covered peril. This type of insurance is not sold on a standalone basis but can be added to your commercial property insurance policy or bundled with a business owner’s policy.

Example:

• Your retail bakery suffers a fire. It takes the bakery 2 months to clean up and reopen. The business has both property and business income insurance. The property insurance will cover the damages to the bakery’s equipment and storefront. The business income insurance will cover the lost profits for the 2 months that the bakery is not in business. If the bakery only had property insurance, and did not have business income insurance, it would have been in danger of going out of business while recovering from the fire.

Who needs Business Income Insurance?

Business Interruption Insurance can help a variety of businesses, but it may be particularly important for companies that:

• Depend upon physical properties and assets to operate their business
• Are located in areas with frequent natural disasters
• Have equipment or machinery that is heavily customized or time-consuming to purchase

Business Interruption Insurance is important for companies that rely on physical assets to operate their business, which includes most retail, restaurant, wholesale, and manufacturing businesses. Some service businesses, like hair salons, which require specialized facilities should also consider purchasing Business Interruption Insurance. For small and midsize companies that rely on a small number of resources and may not have the redundancy of larger companies, Business Income Insurance can be a critical coverage. Often, smaller companies that suffer property damage may have no other option than to shut down for a period of time, while larger organizations may be able to operate from another office or retail space.

Companies in industries where work can be done remotely or where work is typically done at client homes or offices, like an appliance repair service, likely do not need the coverage provided by Business Interruption Insurance.

What does Business Income Insurance cover?

Business Income Insurance typically covers:

• Lost income if your business is unable to operate due to damage or destruction of property by a covered peril
• Profits that would have been earned based on historical financial records if property damage had not occurred
• Fixed operating expenses, including utilities, rent, and employee salaries

Business Income Insurance will kick in when there is a suspension in your business, which occurs if your business operations slow down or stop. The suspension in your business must be caused by the direct physical loss, damage, or destruction to property used by your business. The loss or damage must result from a covered cause of loss in your commercial property insurance policy, and the perils covered are identical to your property policy. For example, fire damage is covered in property insurance, but flood damage is usually not covered, so fire damage would be covered in the Business Income Insurance policy, and flood would also be excluded.

If you lease your business premises, the building that houses your business may not be insured under your property policy. However, if the building suffers physical damage from a cause of loss that is covered in your policy, you will still receive coverage under your Business Income Insurance policy.

Period of Restoration

The period of restoration is the amount of time that is reasonably required to rebuild, repair or replace the damaged or destroyed property, or the amount of time required to move into a different property and permanently reopen, whichever is shorter. During this period, the insurance company will compensate your business for lost income under a Business Income Insurance policy.

Example:

• Your manufacturing facility catches on fire and is destroyed. It takes three months to move to a new building, purchase, install, and configure new manufacturing equipment so that your factory can reopen. The period of restoration lasts from the time of the fire until the factory reopens in three months. During this time, your Business Income Insurance policy would provide coverage.

The period of restoration does not end if the policy expires or ends, as long as the physical loss or damage occurred while the policy was active. The insurer will continue to pay for losses to business income up through the end of the period of restoration.

Example:

• Your business experiences a loss on May 25, and your Business Income Insurance policy ends on May 31. The period of restoration for this loss is 2 months, so the policy will pay for your lost business income through July 25 even though the policy has expired.

On many policies, the period of restoration is limited to a maximum of 12 months. This maximum can usually be extended up to an additional 24 months when purchasing the policy by paying an additional premium.

Waiting Period

Business Income Insurance is usually subject to a waiting period, which is most commonly 72 hours. None of the losses to business income during the waiting period are covered. The waiting period begins at the time of the loss.

What are the key exclusions to Business Income Insurance?

Business Interruption Insurance is not meant to cover normal business risks such as economic risks or poor business decisions. It is meant to protect your business against accidents and disasters that are out of your control.

Some things that Business Interruption Insurance does not cover include:

• Reduced profits due to competitors or changes in consumer preferences
• Poor company management
• Slowdowns in the economy
• Weather events that may close a business temporarily but not damage property, such as heavy rain or snow

Business Income Insurance Pricing

Business Income Insurance is not sold on a standalone basis but can be added to your commercial property insurance policy or bundled with a business owner’s policy. In order to determine pricing for your property policy, insurers will take a look at the risk of loss for your business. Part of this calculation will involve assigning a commercial property insurance rating, which is specific to the building or property you’re looking to insure. The higher risk your business is rated, the higher the premiums will be.

Some of the factors that can affect your premium pricing include:

• Claims history. A history of prior losses can increase your premiums.
• Neighbors. Neighbors engaged in risky activities, such as a dry cleaner using flammable solvents or chemicals may increase your premiums.
• Fire risk. Having a fire station nearby may lower your premium. Fireproof (brick or stone) construction or fire-resistant interior floors, walls, and doors cost less to insure. Fire alarms or sprinkler systems may also reduce your rates.
• Business type. Depending on what type of business you run, your risks for property damage may be higher or lower. For example, in the same location, a restaurant or auto repair shop would have higher risk and higher premiums than a flower shop due to increased risks of fire.
• Neighborhood. The surrounding neighborhood characteristics can also affect your rate. If the immediate area has high levels of criminal activity or is exposed to frequent accidents or natural disasters, your rates may be higher. Also, if you have neighboring businesses with high fire risks such as an oil refinery, you may also face higher rates.

In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance company. Below we’ve highlighted a few of our trusted partners who offer property policies:

Provider	Business Income	Commercial Property	Business Owner's Policy
CoverageSmith	??	??	??
CoverWallet	??	??	??
Thimble	??	??	??

Business Income Insurance vs. Extra Expense Coverage

Extra expense coverage is an additional, optional coverage that can cover extra expenses to keep your business running after an accident or disaster. It is valuable for businesses that need to operate right away after a disaster, or who can move to a temporary location to avoid a shutdown.

Extra expenses coverage will cover anything beyond your normal day-to-day operating costs. This means anything above and beyond repairing your business’s physical property that you would not have incurred without the incident that damaged your business’s property, during the period of restoration.

Example:

• Your business sells office supplies and operates out of a warehouse you own. A windstorm damages one wall of the warehouse. In order to continue to service your customers without interruption, you rent a temporary warehouse. You also pay a moving company to move your inventory from your normal warehouse into your temporary warehouse. The extra expense coverage would provide coverage for these expenses.

Additional Business Income Coverages

Several other coverages can be added on to your Business Interruption Insurance that can provide protection against additional risks that can interrupt your business operations. These coverages require the payment of additional premiums.

Extended Business Income Coverage

Extended business income coverage is an optional coverage that can cover lost profits that occur after the business has reopened but has not yet gotten back to its pre-loss sales level.

The core Business Income Insurance coverage only covers lost profits during the period of restoration. Once the business is reopened and able to operate at the same capacity as its pre-loss level, the period of restoration and Business Income Insurance coverage ends. However, it may take some time before customers realize that a business has reopened, and the business may not immediately get back to its sales level before the loss occurred.

Extended business income coverage can compensate the business for the difference between the actual profits the business is earning after reopening and the profits the business earned before it closed. The term of this coverage can be elected by the policyholder, with longer terms requiring higher premiums.

Service Interruption

Service interruption coverage can protect against direct physical loss or damage to utility lines that service your business. These utilities include electrical, gas, water, sewer and other types of utilities. If physical damage to these utilities causes your business to have interrupted or impaired operations, your income losses can be covered under service interruption coverage.

Contingent Business Interruption

Contingent business interruption coverage provides coverage if your direct suppliers or customers suffer a physical loss to property caused by a peril listed in your policy which causes a reduction to your business income.

Example:

• You own a manufacturing business that relies on custom precision parts from a ball bearings company, and their factory burns down. You cannot manufacture your product without their parts. Contingent business interruption would cover your business for the income losses you suffer while the part is not available.

Leader Location

Leader location coverage protects your business if a direct physical loss occurs at a neighboring business that draws customers to your business.

Example:

• You own an ice cream store at a shopping mall, and your shop is located next to the anchor tenant, a major national department store chain. A fire at the department store closes it down for several months, causing your foot traffic and profits to suffer. Even though your property did not experience any damage, leader location coverage would cover your lost profits.

Interruption by Civil Authority

Interruption by civil authority coverage protects your business if the government prohibits access to your business due to physical damage or destruction of neighboring or adjacent properties.

Example:

• A wildfire burns down properties near your business and continues to burn, and the local government may not allow you to access your property for safety reasons. This coverage would compensate you for your income losses in this case.

Business Income Insurance and Coronavirus

The coronavirus pandemic has forced many businesses to temporarily close operations, whether due to local government or health orders or simply because of a sudden drop in demand. Many businesses are looking to their insurance policies to provide coverage during this difficult time. Business Interruption Insurance has been a hotly contested area, as many businesses that have sought coverage from their policies have seen their claims denied by insurers.

Although the coverage provided by Business Interruption Insurance will vary based upon the specific language in your policy as well as the laws and court rulings in your state, most business interruption insurance only provides coverage when there is a direct physical loss or damage to property at your business location. Many insurers have used this as justification to deny coronavirus-related claims. In most commercial property policies, however, the term “direct physical loss” is not specifically defined, so the definition has generally been decided through court cases.

Currently, the majority of court cases have ruled in favor of the insurers. However, a few high-profile cases have been found in favor of the policyholders. As the pandemic continues to impact the American economy, it’s possible that more courts will rule in favor of restaurants, bars, and other small businesses.

For more information on coronavirus and its impact on business insurance, check out our FAQ.

Final Word

If your business depends on a physical location or physical property, you may benefit from the coverage provided by Business Income Insurance. In the face of a disaster or accident that causes damage to your physical property, you may be temporarily unable to continue your business operations. While your property is being repaired, financial losses from paying fixed expenses like utilities, rent, and payroll can add up, while your income dries up due to your business closure. Business Income Insurance can help your business in this type of scenario, providing you with funds to keep your business afloat while repairs to your property are underway.