Your business is more than just a building. It’s an operation that needs to keep making sales and generating revenue to keep the doors open. When a fire or flood damages your business property, you face more concerns than just repairing and replacing lost property and structural damage, you are also losing revenue that would be generated if you were open for business.
You still have bills to pay and obligations to meet after a fire or flood affects your business. You still have to fulfill obligations such as loan payments, payroll, utility costs, rent, and many of the ongoing costs of running a business whether your doors are open or not. Many businesses cannot afford to keep up with their costs when they are not generating revenue.
Business interruption insurance is designed to protect your business when something happens that prevents you from staying in operation. Typically, business interruption insurance is part of your commercial property insurance. It provides coverage for business income loss as a direct result of damage or destruction to the insured property.
The insurance industry is talking about the growing list of events that can trigger business interruption insurance. Fire, flood, wind storms, earthquakes, and other natural catastrophes are the traditional events associated with this type of insurance, but increasingly coverage is triggered by events such as cyber-attacks and access restrictions by civil or military authority, often as a result of terrorism or politically-motivated violence.
When you are unable to earn a business income, it may be time to file a claim for business interruption insurance. Start by learning about this unique type of coverage and the terms associated with it. You can also get help dealing with insurance adjusters to make sure your claim is accurate and fully compensated.
Terms You Should Know
The insurance company is responsible for the loss of net income as result of the whole or partial loss of use of your business property. The common definition of business income is the net income (profit or loss) before taxes and continuing operating expenses such as payroll.
Actual Loss Sustained
Actual loss refers to all actual costs and expenses incurred due to physical damage to the business property. This is the total amount paid out by the insurance company, not necessarily the amount received by the insured. For example, if the insurer hires contractors on its own to repair a business property, the cost would be included in “Actual Loss Sustained” but not money received by the insured. Actual Loss Sustained would include costs of repairs, cost of debris removal, costs for contractors and other specialists, and business income.
Period of Restoration
The period of restoration is time required to repair and rebuild the damaged business property and replace property such as equipment or merchandise. The period of restoration technically begins when the loss occurs, i.e., flood or fire damage, and ends when the property is completely repaired.
The type of business interruption insurance you contracted for defines whether the insurer is only responsible for paying for lost business income through to the end of the period of restoration or if they will continue to cover some costs beyond the date on which repairs are complete. This is the difference between limited risk insurance and extended risk insurance, also known as limited indemnity and extended indemnity.
Limited Risk and Extended Risk
Limited risk (or indemnity) limits the insurer’s responsibility to compensate lost income only to the period of restoration, i.e., from the time of damage to the completion of repairs, rebuilding, and replacement of lost or damaged property.
Your business absorbs the costs of operation without any income after a fire or flood. Many of the expenses of running a business do not stop even after loss. Businesses rely on business interruption insurance to replace business income in addition to repairing the damage or else they could face bankruptcy and closure.
Covering the loss of business income through the period of loss may not be enough. According to some estimates, as many as 70% of businesses fail within three years of a fire, if they re-open at all. Increasingly businesses are taking policies that offer extended risk coverage to help them through the rough period of re-opening after the period of restoration is complete.
Extended risk (or indemnity) grants a business a longer period of coverage, extending coverage beyond the time required to restore the business property. This extension is important because the effects of loss can be felt on a business long after restoration is complete. Sales (or production) immediately after the restoration period are typically not as high as they would have been if there had never been any loss of property. Extended risk coverage gives your business time to get back on its feet, reconnect with customers, and continue operating.
Many business interruption insurance policies written more recently have an automatic 30-day extended risk period, but it may be a separate category which might not have been considered when you entered into the contract. The extended risk period allows your business to recoup pre-opening expenses and restore pre-loss revenues. The coverage can help your business pay for expenses such as extraordinary advertising, public relations, hiring new personnel, and other expenses not normally considered part of operating expenses under the insurance policy. That’s because these expenses are considered extra expenses and would reduce the costs the insurer would have to pay in extended risk coverage.
These are necessary expenses incurred by the business to mitigate against your losses. For example, extra expenses might include moving equipment off-site if leaving it on-site would lead to further damage or risk of theft. Extra expenses can include any reasonable effort to minimize loss. If your business enjoys extended risk coverage, costs such as new personnel or additional advertising could reduce the amount of time in which your business suffers below-normal revenues.
Importantly, extra expenses cannot exceed the amount the insurer would normally have paid. For example, the insurer would pay $100 to move a $200 piece of equipment off-site and avoid theft; but would not reimburse $200 in moving costs to protect a $100 piece of equipment.
In addition to typical property and business interruption coverages for normal perils, there are optional, additional types of coverage that can help your business when circumstances out of your control interrupt your ability to do business. Business losses can stem from a variety of causes beyond those normal perils of fire and flood, and these additional types of coverage aim to address those atypical causes.
Note that additional coverage will often have a sub-limit amount that will cap the funds you can recoup through insurance.
#1 Contingent Business Interruption
Also known as CBI, contingent business interruption insurance covers business income loss that is a result of loss, damage, or destruction to property owned by direct suppliers or receivers that work with your business. The type of damage must be similar to one of the perils listed under your own business insurance policy, but it can provide compensation when your revenue is disrupted by problems with your supplier or a customer.
If an essential supplier cannot deliver goods you require to conduct your business, CBI insurance would apply. Likewise, if a key customer could not receive goods normally provided by an insured contact, you could be eligible for compensation.
CBI insurance only covers direct relationships, so multi-tiered supply chains may be exposed to gaps in coverage. Suppliers and receivers typically must be identified when this type of insurance is added to your policy.
#2 Service Interruption Insurance
This additional insurance covers direct damage or physical loss to utilities and services such as gas, water, sewer connections, telephone, or electricity that interrupts your ability to do business. For example, a power outage lasting several days due to flooding may qualify, even if the flooding has not affected your business directly. Damage to transmission lines, plants, substations, or equipment belonging to the service provider that ultimately impacts your ability to do business may also be eligible.
Importantly, the damage done to the utility or service must be the result of a peril similar to those covered by your insurance policy. There may also be limitations to coverage such as physical distance between your business and the location of actual damage, i.e., the service utility’s damaged property. There may be exclusions, such as earthquake damage, or exclusions such as damage to overhead transmission and power lines.
#3 Leader Property
Leader property is a type of insurance coverage that can provide compensation for lost business income caused by the damage to property that does not belong to the insured but attracts business to the insured. For example, businesses near a major tourist attraction such as a casino, an amusement park, or even a destination mall could receive business income replacement if the attraction or destination (i.e., the leader property) were closed due to physical loss or damage.
If you’re unsure about making a business interruption insurance claim, call us for a consultation. Business interruption insurance can bridge the gap in revenue caused by physical loss or damage to your business.