What Is Business Interruption Insurance?
What would you do if a fire or storm destroyed your business and you were forced to shut down for six months while you rebuilt? For many small business owners, this can be devastating. No income, no revenue, and no inventory for months or even years can destroy any once-successful business.
When Superstorm Sandy reared its ugly head, many business owners paid the price. Allison Dorst is a New Jersey business owner who operates three websites which sell sportswear. Because of the storm, she lost all power and had no way to operate her business. With a business interruption policy, she was able to get reimbursed for lost profits.
While property insurance may cover the cost of lost property, it does nothing to sustain you or your family for lost income. An important addition to property insurance is known as “Business Interruption Insurance.” Business Interruption Insurance replaces income lost while a company is shut down due to a covered disaster. Despite the obvious benefits that come from this policy, only 35 percent of businesses have business interruption insurance.
Business interruption insurance makes it possible to keep your business afloat while you get it back up and running after a disaster. Most policies will use financial records to compensate you for profits your business would have made had the disaster not happened. Because of this, it is important to keep accurate records of monthly profits to demonstrate income. Additional coverage may include payment for utility bills even though you've temporarily closed your doors and some policies also cover payroll.
The length of coverage depends on the specific policy. The time it may take to get your business back up and running can vary depending on the severity of the damage. It could take anywhere from a few days to several months. So, when buying business interruption insurance, it is important to understand your policy limits.
Business Interruption policies can range in price from $750 to $10,000 or more, depending on business size, which is why most owners do not include this coverage in their policy. However, the rising number of natural disasters may make you think twice. According to a recent survey, natural disasters have increase by more than 200 incidents per year. That doesn’t include other isolated accidents such as fire or flood.
Calculating Your Policy
To figure out your ideal coverage amount, you should envision how your business would be affected by a catastrophe. Consider if you live near the coast or in areas especially prone to disasters. Additionally, examine all the costs that would continue even if your business couldn’t operate, such as loan or lease payments and taxes. If you would want to keep workers on the payroll while you rebuild your factory or store to avoid losing skilled labor, your insurance should reimburse you for their salaries. Also consider if your business is dependent upon another, for example, a server farm, or warehouse in another location. "Contingent business" insurance covers your lost profits in these disaster scenarios.
When disaster hits, understand that most insurers will generally exclude the first few days after a disaster from their calculations, so you should put aside what you’d need in cash to cover those costs, and have documentation readily accessible such as in an off-premise location, so you’ll still be able to prove your losses even if your main facility is destroyed.