Business Interruption Insurance

By: Stacey Mandigo – Account Manager
Rhodes & Williams Insurance Brokers

Business owners naturally hope, perhaps even assume, that their company will never be faced with a sudden stoppage. You go to your office one morning and find your office has been flooded or you’ve had a fire or there was an electrical fire in another part of the building that caused your office and all your equipment to be damaged by smoke. No computer, no phones, no way of contacting clients or delivering products. All of a sudden, your business is at a standstill. What do you do and what can your insurance policy do?

Establishing a plan and a clear understanding of what risks your business face is paramount to protecting yourself if the unforeseen should happen. Business Interruption Insurance could mean the difference between staying in business or closing your doors for good.

This coverage is designed to compensate you for lost income if your company suffers disaster-related damage that is covered under your property insurance policy, such as a fire. Business interruption insurance covers the profits you would have earned, based on your financial records, had the disaster not occurred. The policy also covers operating expenses, like electricity, that continue even though business activities have come to a temporary halt.

There are several types of Business Interruption policies. One of the most common is called “gross earnings” and will pay only until the property or damage is repaired or replaced. As soon as business resumes, the policy will stop paying. This is regardless of whether or not you have reached your previous level of earnings. If, in the time the business was closed, you lost a large portion of clients to your competitors, your business will not be operating at the same level as before the loss. Yet your insurance will have stopped paying. Typically, this is a less expensive coverage and it may not be adequate for your needs.

A “profits form” will continue to pay until your business resumes its normal level, subject to maximum period of indemnity. Depending on the type of form, it can be from 12 to 24 months. It is more expensive but depending on your type of business, if you are in a highly competitive market, this may be well worth the price.

Another type of Business Interruption Insurance is Extra Expense. This type of coverage pays the additional costs associated with continuing services or operations even if the costs are higher than can be recovered by resulting sales. If you must continue to operate after a fire or similar disaster to avoid losing customers that may never be recovered, this coverage is for you. It can be used to supplement loss of earnings insurance or it can be purchased by itself. Consider a situation where only your server is damaged in a loss. You do not need to move and your business is still open but you do need to purchase a new server and then get it up and running. This could require specialized personnel, overtime and training of key personnel and could cost thousands of dollars in expenses. Ask your IT person what would be involved in restoring the data on your server. You may be surprised.

Another extension to Business Interruption Insurance is Contingent Business Interruption. How much of your company’s operations rely on another entity? How disruptive would it be if you lost a key source of raw material or component parts from a supplier? This coverage is an extension that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or supplier. If the damage to the supplier/customer has been caused by a peril insured under your policy then coverage would be available under this extension. If your business depends on a single supplier, if your business depends on one manufacturer for most of your merchandise, if your business depends on one customer to purchase the bulk of your products, then this is a coverage you must consider.

We must stress the importance of establishing a business continuity plan for your operation. Many businesses do not re-open after a significant disaster because they do not make plan in advance. We can help design a program specifically for the needs of your business. Protect yourself and protect your business.