Author: Nancy Germond 

Business interruption (BI) insurance coverage protects business owners against lost income claims when a covered peril causes the business owner to either close or reduce their operations. BI coverage is typically part of the business owner's commercial property policy, or for smaller businesses, part of their businessowners policy.

While most business owners know they need property insurance to cover physical losses such as water damage or losses from a fire, they may not understand the need to protect their income stream after this type of loss. Even if closed temporarily, many business owners do not have sufficient capital available to meet continuing costs such as mortgages and payroll.

Business interruption insurance, also called business income insurance, can provide help with operating expenses that continue during the owner's business restoration period.

What Triggers a BI Loss?

Generally, a loss that triggers the commercial property policy (CPP) or the business owners policy (BOP) will trigger a BI loss. The CPP or the BOP would pay the physical damage losses, for example to repair the fire damage or replace lost articles. The BI coverage would then address the reduced income the business owner suffers resulting from that property loss.

In the case of a business shut down by civil authorities after an adjacent wildfire, for example, civil authority coverage may be available. Generally, though, there must be direct physical loss to an adjacent property.

Civil authority coverage generally extends only two weeks post loss. There are several endorsements available from the Insurance Services Office (ISO) that help extend this coverage. Coverage may also be available by endorsement to protect “dependent properties." These can include an important supplier or customer affected by a physical loss that could impact the business owner. For example, if the business owner relies on foot traffic from an adjacent big box store and that store burns, that could reduce the business owner's revenue.

What Costs Does the BI Policy Typically Cover?

The BI policy typically covers these costs.

• Reduced net income
  
• Mortgage, rent, or lease payments
• Business loan payments, such as small business administration loans
• Taxes
• Employee payroll

Employee payroll can be a bit tricky, so this article can help you determine what is and is not covered by employee payroll expenses.

Most BI policies have a “period of restoration," the time the policy reimburses for lost income and extra expenses to get the business back to operational. The CPP period of restoration ends on“... the date the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and similar quality; or the date when business is resumed at a new permanent location." 

There is generally a “waiting period" that acts as a time deductible before coverage kicks in. This waiting period is generally 48-to-72 hours.

It's important that you work with your customer to determine sufficient BI limits. Especially when the U.S. experiences supply chain problems, getting a business back to normal after a loss can take much longer than the client expects.

Sometimes losses extend beyond the period of restoration. For example, a hotel that is out of business for many months may lose regular customers who begin to frequent other hotels. In these types of cases, extended business income coverage can help smooth those losses.

What Records Will the Insurer Review?

Your insured must supply some or all of the following records to substantiate lost or reduced income.

• Profit and loss statements
• Sales records
• State and federal tax records as requested
• Rent records for tenant-occupied properties
• Payroll records
  

Insurers will not reimburse income that your insured does not reflect on his or her bookkeeping records, for example cash payments.

Exclusions on the BI Policy

There are some important exclusions on the BI policy. These can include the following.

• Damage from floods or earthquakes
• Income that your insured does not reflect on his or her financial records
• Utilities in most cases
• Losses arising from viruses or pandemics such as the recent COVID-19 business closures

How Much BI Coverage Does My Client Require?

First, don't “go it alone" as a new insurance agent. Work with another agent experienced in this coverage to help determine appropriate limits. Always ensure you leave the choice up to your insured if you offer coverage alternatives. You never want your client to say, “You told me how much insurance I needed." This is fertile ground for an errors and omissions claim.

ISO offers the CP 15 15 business income worksheet to help your clients to determine adequate limits. If the business owner buys limits below the amount of gross earnings and projections they estimate, they'll have to pay out of pocket. This can force business owners into bankruptcy.

The Big I has a number of solid business income training videos available on BI.

Looking Ahead on BI Coverage

According to one expert publication, in 2022, procuring adequate business interruption insurance was one of the top three risks faced by business owners. If you'd like to learn more about the history and future of BI insurance, listen to this presentation by the National Association of Insurance Commissioners.

As you can see, this is a multifaceted coverage, so work with your supervisor when first placing BI coverage. Take advantage of the Virtual University's many training tools on business income insurance.

Most of your business clients have this critical BI risk exposure. Given that, it's not whether your insured “has" the BI coverage; it's if the BI coverage “properly protects" your insured, according to one insurance expert.

Many errors and omissions allegations arise out of this important coverage, so if you're new to writing this coverage, always work with your supervisor or mentor when placing coverage.

Last Updated: January 13, 2023