Managing Partner
Business interruption insurance is more important than ever given the current global climate crisis than ever. About one-third of U.S. small businesses carry business interruption coverage, so the vast majority of small businesses are left unprotected and unaware of just how vital this kind of insurance is.
This, unfortunately, impacts a significant number of business owners in the U.S. But the truth is, most small business owners in the U.S. are not even aware of what a business interruption insurance policy is and how it can benefit them during times of significant financial stress.
Understanding insurance of any kind can be complicated and often discouraging when claims are denied. Here’s everything you need to know about business interruption insurance and what to do next if you need litigation in New York.
What is business interruption insurance?
The official definition of business interruption insurance is “insurance against loss of net profits and continuing fixed charges during a period of total or partial suspension of business activity because of damage to described premises from specified perils,” according to the Merriam-Webster Dictionary.
It can also be referred to as business income coverage.
While a lot of property insurance will cover if something happens like a tree falling on your business’ roof or a theft taking place, business interruption insurance takes it a step further. It covers the loss of income that occurs due to these incidents. For example, if the theft resulted in a temporary closure because they stole all your inventory or damaged your windows, forcing a shutdown to occur, your business interruption insurance policy would help you still pay your employees and rent even though you are losing days of earning income.
“It pays your bills that continue during the interruption and any profit you would have earned. For most businesses, the most important (and biggest) thing is to continue to pay your expenses, like payroll,” Bill Wilson said in an interview with U.S. News. Wilson is an expert in the field as an insurance consultant and author of the InsuranceCommentary.com blog and four books, including “When Words Collide: Resolving Insurance Coverage and Claims Disputes.”
Often business interruption insurance is bundled into a business owners’ policy or BOP. These combine the following into one policy:
- general liability insurance
- commercial property insurance
- business interruption insurance
What exactly does business interruption insurance cover?
Business interruption insurance has very specific guidelines on what it does and does not cover. According to the Insurance Information Institute, business interruption insurance can cover the following:
- Lost net income (based on financial records)
- Mortgage, rent and lease payments
- Loan payments
- Taxes
- Employee payroll
However, business interruption insurance does not cover:
- Broken items resulting from a covered event or loss (such as a broken window resulting from a burglary or a tree following through a window).
- Flood or earthquake damage (these kinds of events are typically covered by a separate policy)
- Undocumented income that’s not listed on your business’s financial records (document everything!)
- Utilities
- Pandemics, viruses, or communicable diseases (such as COVID-19)
How much does business interruption insurance cost?
According to the Insurance Information Institute, the cost of a business interruption insurance policy is dependent on several factors. Some of the main ones include:
- Your specific industry (e.g., a restaurant may cost more than a shoe shop because of the increased risk for fire due to using a kitchen regularly)
- Total number of employees
- Amount of coverage
- Prior claims experience (i.e. if you have ever needed to file any claims with your insurer previously)
- Location (if you’re in an area at high risk for tornadoes or hurricanes, this will be a factor to consider as your policy may be higher than someone whose business is located somewhere else).
Still, BOPs are often very affordable for small business owners, according to Forbes.com. On average, you can expect to pay around $53 a month– and that’s for the three types of policies bundled into one instead of just a separate business interruption insurance policy.
Does Your Business Need A BOP?
Still not sure if your business needs a business interruption policy? According to Forbes.com, most small-to-midsize businesses could benefit from looking into a business interruption policy or a BOP that includes it. Here’s who needs one:
- Companies with 100 employees or fewer
- Businesses with revenues of up to about $5 million
Also, it’s important to ask yourselves these questions to determine how much coverage you should get for your business from Forbes.com:
- How long would it take to get your business up and running after a disastrous problem like a fire, tornado or hurricane?
- Are the security and fire alarms for your business up to date?
- How much would it cost to rent a new office space in your area and readily available space?
Potential Complications
As with most insurance policies, there can be complications. The main one to consider is being absolutely sure you picked the right coverage amount before a disaster strikes. Often, companies underestimate what is needed to get back up and running.
“After a major disaster, it can take more time than many people realize to get back in business,” Mark Friedlander, a spokesman for the Insurance Information Institute, said in an interview with U.S. News. “Typically, there’s a 48- to 72-hour waiting period before the period of restoration kicks in.”
Also, as we’ve seen in recent years, coverage parameters are ever-changing. As mentioned previously, pandemics are not covered by business interruption policies. Insurers began writing this particular exclusion for pandemics and viruses in 2003 after the SARS outbreak. As a result, 83 percent of U.S. business interruption policies now include virus exclusions.
According to Friedlander, of the 17 percent that did not include a virus exclusion written within the policy, 98 percent of those insurances had a “physical loss” requirement for the business interruption insurance policy to be used.
What this means is that these policies would then only payout if the business were closed because of physical damages to the building or property — so a pandemic causing shutdowns still would not mean your business interruption policy would cover that loss of income.
During the COVID-19 pandemic, many small businesses meant a permanent shutdown.
Woods Lonergan is Here to Help
Understanding insurance policies and insurance law can be complicated, but you don’t have to sort it all out alone. In a world where filing insurance claims can often lead to litigation in New York, having experienced legal counsel to navigate the situation and represent you is vital for any business– regardless of size.
Woods Lonergan has a team of qualified and experienced legal professionals who understand the ins and outs of business litigation in New York. We are willing and ready to represent you, so your business receives the coverage they need and deserve.
But don’t wait until an insurance or legal issue arises before securing your legal team.
When you start with legal counsel in your corner before anything bad happens, your business is protected and better equipped to handle whatever is thrown its way. Your legal team can help ensure things are running smoothly before it has a chance to go awry. And when something does go wrong, you can rest assured that we can help you through your legal struggles.
We are excited to work with you and help your business maintain the protection and representation it deserves.
Get more information on the legal services offered by Woods Lonergan.