Business Interruption Insurance: A Complete Guide

Disaster can strike at any moment without warning. Without adequate insurance, your business loses income from forced closures and may not survive. But business interruption insurance protects you from this catastrophic consequence by providing compensation for net income loss and covering your company’s overheads throughout the disruption.

Despite the somewhat simple nature of this type of insurance, we’ll cover all the details and limitations below and even tell you about how we can help you get the best coverage.

 

What Is Business Interruption Insurance?

Business interruption insurance covers you for any net income lost after a covered property loss. It may also cover the overheads that keep your business operating.

However, it’s not a standalone policy. It’s usually included automatically in your commercial property insurance.

 

What Does Business Interruption Insurance Cover?

Generally speaking, business interruption insurance usually includes coverage for the income you’ve lost because of an insured disaster. It also tends to cover your overhead costs like rent and water after a pre-defined period following your business closure (typically 12 to 24 hours).

Policy specifics depend on your insurer. But they tend to cover the following expenses:

  • Moving to a temporary business location after physical damage to your usual premises
  • Overhead costs like rent, mortgage, or lease payments and electricity
  • Employees wages and payroll
  • Taxes and loan repayments, if they’re due throughout the covered period
  • Lost revenue based on your previous financial records
  • Telephone connections
  • Internet connections

 

What Doesn’t Business Interruption Insurance Cover?

Most business interruption insurance won’t cover you in the following circumstances:

  • Pandemics, communicable diseases (i.e., illnesses spread through contact with bodily fluids, insect bites, air transmission, or blood products), or viruses
  • Flood or earthquake damage as they are covered under different policies
  • Acts of terrorism (some policies might cover bomb threats)
  • Broken items (like glass) due to a covered loss or event
  • Undocumented income that you haven’t previously listed on your company’s financial records

 

Additional Business Interruption Coverages to Consider

You can add optional extras to business interruption coverages if you wish to extend the protection. The main three additions are as follows:

  • Civil authority — This extends your business interruption insurance to losses incurred when civil authority (i.e., a state, federal, or local government entity) prohibits business premise access due to physical damage to a nearby property.
  • Extra expense insurance — Extra expense insurance covers your business expenses during the period of restoration that your company wouldn’t have dealt with if there hadn’t been physical property damage. Usually, the covered expenses are associated with minimizing the time you’re closed or keeping your business running during restoration.
  • Ordinance or law (i.e., business ordinance) — It covers business interruption losses that came from a longer-than-expected time to repair the damage to your property.

 

Who Needs Business Interruption Coverage?

If you own a business, you need business interruption coverage. It’s as simple as that. Otherwise, you aren’t protected against lost income if a covered loss occurs.

When deciding whether to get business interruption insurance, you need to consider the aspects of your business that could impact the time it takes to get back to standard operations after a disruption. If you have specialist equipment or run a particularly large workspace, you may need more coverage than smaller businesses or those who use standard machinery.

To give you an idea of the range of companies and organizations that benefit from business interruption coverage, have a look at the list below:

  • Travel agents
  • Tour operators
  • Charities and non-profit organizations
  • Fleets and couriers
  • SME and large companies
  • Education establishments like student accommodation entities and independent schools
  • Motor trade
  • Sports associations and leisure trusts

 

How Much Does Business Interruption Insurance Cost?

Rates for business interruption insurance tend to start at $100 and cap around a few thousand per year, based on your coverage amount and revenue.

Usually, it’s included in your commercial property or business owner’s insurance automatically. Alternatively, you can add it to a different kind of policy. Regardless, the cost might be calculated separately from the other coverage.

Aside from your coverage limit, your premium depends primarily on the following five factors:

 

#1 Location

Some neighbourhoods are more prone to crimes like vandalism or adverse weather conditions like storms. If your workplace sits in a particularly risky area, you should expect to spend more on your business interruption insurance than competitors in safer environments.

 

#2 Number of Employees

The more staff members you have, the larger your insurance quote. Why? Because the more employees present in your business, the higher the chance of problems arising, especially if they lack experience.

 

#3 Your Business Type

Your insurance premium increases if your industry is riskier than others. For example, if you run a restaurant, you run a higher chance of starting a fire than somebody who works in an office building.

On top of that, if your company is more expensive than most to relocate, you must pay more for business interruption insurance.

 

#4 Your Company’s Revenue

Insurers have to give more compensation to fund your lost income when your business has a high revenue. Therefore, the more cash your company makes, the more you’ll need to pay for insurance.

 

#5 Business Insurance History

If your business insurance claims history is long, it can raise the cost of your interruption insurance coverage. Insurers look at your history to decide whether you’re likely to make a claim in the future, and therefore, the likelihood of them needing to payout.

 

How Is a Business Interruption Claim Calculated?

Your policy dictates how business interruption claims are calculated. But usually, the value of your claim depends on the three factors below:

  • Gross profit — Your gross profit is the maximum amount you’re insured for. When you buy business interruption coverage, you must declare this figure. Generally, claims are paid on a “declaration linked” basis. That means your insurance provider might add an uplift to your forecasted gross profit to allow for future turnover growth.
  • Indemnity period — The indemnity period is the duration that’s covered under the business interruption policy. Usually, they last for 12, 24, or 36 months. You should choose a period that covers the worst-case scenario to ensure appropriate funding.
  • Additional expenses — Your business closing may trigger other costs, like accountant’s fees or temporary premises rent. If they are covered under your business interruption policy, the insurer offsets it against the loss of income payout.

 

Is Business Interruption Insurance On Its Own Enough?

As business interruption insurance is included inside your commercial general liability policy, your company won’t be in a situation where you only have this cover. However, CGL may not be enough either. So, you should consider other insurance coverages, such as:

 

Errors and Omissions Insurance

Mistakes are inevitable — even if you’ve been in the industry for a long time and are more than qualified to do your job appropriately. Therefore, businesses take out errors and omissions insurance to protect themselves from clients claiming financial loss due to a service you provided. Additionally, it protects against lawsuits alleging negligence, omissions, errors, failure to deliver promised services, and misconduct.

The average cost for this type of insurance policy in Canada is $250 for $100,000 worth of coverage. However, the price differs based on a variety of factors, including:

  • Experience
  • Industry and services offered by your business
  • Number of employees
  • Size and location of your business
  • Annual and forecasted revenue

 

Product Liability Insurance

If you distribute, manufacture, or sell products instead of services, this policy protects you against claims of third-party bodily injury or property damage.

We recommend product liability cover if you sell, manufacture, or distribute any sort of product, including food and drink. Even businesses without a brick-and-mortar storefront should consider this policy as claims may still be made against your products.

With that said, it isn’t a legal requirement — just a strong recommendation.

 

Commercial Auto Insurance

Whether your company has an entire fleet of vans or just one company car, you must take out a commercial auto insurance policy. Thankfully, they are highly customizable to ensure you get the automobile coverage you need.

Commercial vehicle insurance covers:

  • Uninsured auto
  • Accident benefits
  • Third-party liability
  • DCPD (also known as direct compensation-property damage)

 

Legal Expense Insurance

Hiring lawyers isn’t just expensive, but it’s also intimidating, especially if you’ve never needed to do it before. Legal expense insurance helps with both the cost and the acquisition and retention of an experienced lawyer.

The average policy costs $200 per annum, but this can change depending on your industry, annual revenue, and the history of your legal issues.

 

Directors and Officers Insurance

If your corporation has a board of directors or officers, this policy covers the fees related to losses, legal defence, or indemnification of one of your executives. You can acquire D&O insurance whether you’re a non-profit, for-profit, private, or public company.

It includes coverage for:

  • Employee discrimination claims
  • Wrongful dismissals
  • Breach of fiduciary or legal duties
  • Decisions that caused adverse financial effects for your company’s shareholders
  • Misleading statements
  • Inaccurate disclosure or reporting problems
  • Failure to abide by regulations set by federal or provincial codes
  • Allegations relating to negligence or misrepresentation

 

Cyber Liability Insurance

If your company’s computer network or systems are hacked or breached, the impact could be incredibly expensive. Not only do you need to contain the issue, but repair the damage and compensate any third parties, all of which cost money.

Cyber liability insurance covers the costs so your business can stay afloat throughout the challenging time. Specifically, it funds the areas listed below:

  • Repairing and restoring system damage
  • Legal, breach, and forensic management
  • Responding to the incident

The cyber side of business interruption insurance is often found in this policy.

 

Commercial Property Insurance

If you own or rent a space for your business, you should consider purchasing a commercial property insurance policy. It gives you financial coverage for the physical damage or loss of your property and contents.

Much like home insurance, the cost of the policy depends on a variety of factors, such as:

  • The condition and age of the building
  • The type of property and business
  • The location of the building
  • Your company’s previous claims history

 

Why Choose LiabilityCover?

We pride ourselves on saving you time and money by giving you a convenient, speedy way to purchase insurance from brokers and agents specializing in your industry.

No matter what kind of business you run, we can connect you with a licensed, experienced broker or agent in a matter of moments. Here’s how our process works:

  1. You submit a request via our website.
  2. Our knowledgeable team analyzes your insurance requirements.
  3. After that, we connect you to a RIBO broker (Registered Insurance Brokers of Ontario) with experience working in your industry.
  4. The broker or agent we assign to you gets in touch to aid you through the process of obtaining the right insurance for your business.

In just four steps, we provide easy access to the right policies for you. Let us take the hard work out of insurance acquisition.

 

Frequently Asked Questions About Business Interruption Insurance

 

What Triggers a Business Interruption Claim?

A business interruption loss is covered only if it results from covered damage or physical loss to your property. The specific events that trigger your coverage are listed within your policy documents.

 

Can You Get Business Interruption Insurance as a Standalone Policy?

No, it’s automatically included in most commercial property insurance policies. If not, you can add it to a business insurance policy as a rider.

 

Is Business Income Insurance the Same as Business Interruption Insurance?

Business income insurance and business interruption insurance are the same. The terms are often used interchangeably by insurers.

 

What Is The Business Interruption Indemnity Period?

It’s the timeframe that’s covered under the business interruption policy. As we mentioned earlier, it’s often 12, 24, or 36 months long. Some policy’s indemnity period may not start until 24 hours after the closure of your company. Therefore, you may lose a day’s worth of income with your policy; make sure you check the specifics with your insurer.

 

 

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