What is Business Interruption Insurance? (2024)
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There are certain things you just can’t plan for. Whether you are running a hair salon in the suburbs of Winnipeg, Manitoba or a gas station outside of Whitehorse, Yukon, every business owner has to deal with their own unique set of risks.
When the unexpected strikes, small businesses can find their sales interrupted and the health of their enterprises severely jeopardized. This is more common than you might think — statistics show four out of five businesses in Canada have faced interruptions in the past five years.
Business interruption insurance is there to make sure that whatever the eventuality, you and your business are protected. Because while you can’t foresee the future, you can take precautions to guard against whatever it might throw at you. This article looks at what business interruption insurance is, what it covers and how to find the best policy for you.
What is business interruption insurance?
Business interruption insurance, also sometimes referred to as business income insurance, is a form of coverage that protects against lost income incurred by a business as the result of an unforeseen event.
In almost all cases, the coverage lasts for a set period of time, allowing businesses the resources and space to get back on their feet. The events triggering business insurance to come into effect could be anything from a fire to a burglary. Generally speaking, the coverage comes into effect when physical damage or loss is inflicted upon your property and will usually also cover the operating expenses of a business in the event of such a disaster, including taxes, loans and payroll for the company’s personnel. It typically features as an add-on available with the purchase of a normal business insurance policy.
Let's look at an example
For example
Guillaume is an artisan glassblower who employs a team of three in Quebec. One day there is a serious fire that damages the glassworks. It means weeks of downtime for building repairs. But the bills don’t stop while he's unable to work. Fortunately, Guillaume has comprehensive commercial property insurance with a business interruption rider. His insurer steps in to cover his payroll so that he can keep his employees. It helps him with the fixed bills and the substantial repair costs. One month later, Guillaume and his employees are back to work. Without his insurance, he would have been forced to close.
Knowing that you have comprehensive coverage takes some stress off of you as you rebuild. It supports you until you can become operational again and can make the difference between a business surviving a hardship or not.
What does business interruption insurance cover?
Every policy is different, but business interruption insurance usually will usually cover a range of circumstances specified in the agreement. Here is a table detailing some of them:
| Type | Explanation |
|---|---|
| Profits | Policies will typically provide reimbursement for projected profits that would have been earned had the interruption not occurred. This will typically be calculated on the basis of the company’s performance over previous months. |
| Fixed costs | Costs of doing business and other operating expenses such as mortgage or lease payments, the maintenance of machinery, hardware and other specified expenses. |
| Commission/training costs | In the case of certain events, a company will be required to replace hardware and /or machinery and train their personnel how to operate said replacements. Business interruption insurance can cover these costs. |
| Temporary location | In the event that the original premises of a business is jeopardized or damaged, business interruption insurance can cover the costs associated with moving to and operating from a temporary location. |
| Civil authority ingress/egress | Business interruption events due to the closure of a commercial enterprise by government mandate, resulting in financial losses. This may be the result of street closures, a government-imposed curfew or different events specified in the policy |
| Additional expenses | Coverage and/or reimbursement of reasonable expenses beyond the fixed costs of an enterprise that allow it to keep operating until it sufficiently recovers from the insured event and its form of interruption. |
| Employee wages | If a business does not want to downsize or close altogether, it is essential they pay their employees. The right business interruption insurance can help a business make payroll even when they are strapped for cash. |
| Taxes | Even when businesses are hit by disaster, they are still obliged to pay their taxes, which can pose a prohibitive burden when cash flow is interrupted. The right kind of policy ensures businesses can avoid penalties by making their payments on time. |
| Loans | Many businesses have loans with monthly payments. The right kind of policy can ensure a business can meet these payments even if they are not generating income. |
Why do I need business interruption insurance?
You need business interruption insurance because you never know what will happen and when. Sometimes the unexpected comes with crippling costs. A 2021 survey measured the emergency preparedness of businesses operating in Canada. It found that some four out of five companies had seen their operations interrupted in the previous five years.
While much of this was due to the COVID-19 pandemic, some 45% closed temporarily due to communication outages and some 43% due to winter storms. This is to say that business interruptions are unfortunately common. Their associated costs can endanger your business’s ability to function, resulting in unnecessary cuts or, in some cases, having to shut down completely. It is just not worth entertaining these kinds of risks, especially when they can be so easily circumnavigated by a robust insurance policy.
Let's see an example:
For example
Jane and Tina run a laundromat in the suburbs of Vancouver. One night, an electrical fire from next door destroys half of their machines forcing them to shut down for a month for repairs and remodelling. Their business interruption insurance has a policy limit of $1 million and covers their employee wages amounting to $8,000 as well as the cost of their mortgage payments of $3,000. Meanwhile, their property insurance which is part of a bundle makes sure their repairs are taken care of. They are able to resume operations the following month shaken up, but unharmed.
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What does business interruption insurance not cover?
Every insurance provider will have different kinds of policies for different consumers, each with their own specific set of limitations. These will hinge on the price you are willing to pay, as well as the kinds of risk your business is faced with. There are some commonalities on what is usually not included though. These often include but are not limited to the following:
- Interruptions caused by COVID-19, viruses and other forms of infectious/communicable diseases
- Utilities
- Undocumented income not listed on your tax returns or business’s financial records
- Flood, earthquake damage and other forms of natural disasters, which usually require a separate policy altogether.
How much does business interruption insurance cost?
Generally speaking though, costs can range anywhere from $35 to $150 dollars per month for small businesses. Like any form of coverage, the cost of business interruption insurance will depend on a diverse array of factors because every business is different.
For the most limited type of coverage, you could find yourself paying as little as $150 per year, but the cost will increase significantly if you have employees and want a more comprehensive type of coverage. Things to take into account when trying to calculate its cost will be which industry you are located in, your number of employees, the kind of coverage you want and your previous claims history. Insurance for a personal trainer will obviously be different than errors and omissions insurance for an engineering firm because their risks and costs are so different. Additionally, factors like your location can have a large bearing on the costs you might have to bear if they have a higher level of risk associated with them — operating a business the weather conditions of Fort McMurray is different from doing so in Vancouver!
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How long does business interruption insurance last?
That depends upon the policy. Business interruption insurance policies typically have a predetermined period of liability that is limited to a particular number of consecutive days. This period is the length of time that an insurer will help your business pay for its expenses and lost income in the event of a disaster.
Generally speaking, this form of indemnity comes in two forms: limited and extended. Limited indemnity business interruption policies cover loss of earnings. Extended indemnity business interruption insurance policies, on the other hand, typically last for longer and may even cover your business’s loss of profits. Whichever form you opt for, it is important to note that many policies will have a waiting period where they only come into effect after a specific amount of time after the disaster has occurred. Unsure what you need? A business insurance professional can help.
How should I choose between limited and extended indemnity?
It depends. The term indemnity refers to how long the insurance policy is liable to go on paying for your loss of business. Choosing which one is best for your business will depend upon your budget and the needs of your business. In almost all cases, extended indemnity will be more expensive than limited indemnity, but will help your business get back on its feet, providing more comprehensive coverage for a longer period of time. For more information on the difference between the two forms of coverage, see the table below:
Limited indemnity:
Limited indemnity is a policy that will cover your business until the damage it has incurred has either been repaired or the relevant property replaced. When your business resumes its day-to-day functioning, the policy stops even if your earnings are no longer the same.
Extended indemnity
Extended indemnity will pay for your business until it resumes its normal, pre-interruption levels of commerce for as long as the predetermined period lasts, subject to certain constraints.
What is the difference between a named perils and all-cover policy?
The extent of the coverage provided by the policy. Certain insurance policy providers maintain a distinction between ‘named perils’ and ‘all-cover perils’. A ‘named-perils’ policy entails that specific disasters are listed in your business interruption policy that triggers its protections. Generally speaking, this kind of policy will have more gaps in its coverage. In contrast, an all-cover policy is usually more comprehensive and encompasses protections against any set of perils not specifically excluded by your policy. Not surprisingly, it is generally more expensive.
For more information about which policy works best for your business, a business insurance professional can help.
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