Business interruption (or “business income”) insurance protects against temporary losses of revenue and extra expenses due to either a man-made or natural disaster, provided it is not excluded from coverage. It may be a benefit incorporated into a commercial general liability (CGL) policy, property insurance, or other type of standard business owner’s coverage, or found as a rider or endorsement. Business interruption insurance can also be purchased as a standalone policy and tailored to the company.
Operating a business without protection from significant disruptions can leave you at risk of serious loss and possible bankruptcy. Carrying insurance for business interruptions can deliver some peace of mind in the event of an unexpected catastrophe–assuming the insurance provider complies with its duties to not act in bad faith–especially if your business relies on a brick-and-mortar retail location or manufacturing facility susceptible to property damage. There are also “contingent” policies that can be purchased to apply whenever there are disruptions to a major supplier, vendor, anchor location (like a sports stadium), or even a particular customer if your business is heavily dependent on one in particular.
The terms of a policy can be complicated though and, unlike other types of coverage, can vary depending on the provider. It is also important to know exactly what activates coverage or you may find yourself unexpectedly left holding the bag as a result of subtle exclusions. That was the situation for many businesses early in the COVID-19 pandemic, since underwriters had modified their standard policy language after earlier SARS outbreaks to exclude viruses, with most requiring a loss be the result of direct physical harm to property. As a result, it is essential to carefully consider all scenarios that could lead to a need for business interruption coverage, and read the details closely when comparing policy language and your coverage options.
What triggers coverage for a damaged business?
Business interruption policies typically have a three-pronged requirement for benefits to be applicable. Those are:
- Occurrence of a covered peril that causes physical damage to property
- That damage leading to a necessary suspension of business operations
- A loss of business income or extra expense caused by the disruption
There must also be an intent to repair and reopen the business. An owner who decides they do not want to continue with the business after serious damage will not be able to collect benefits under the interruption policy.
Typically, the types of perils resulting in business interruption coverage are the same as those for the property damage itself. You might be surprised to learn some types of disasters are not covered though. If not aware of the limitations, you can be left without coverage when it is needed most.
Business interruption policies typically include losses resulting from fire, lightning, windstorms (except along the Gulf Coast), and collapses caused by certain hidden events, but also man-made incidents such as theft, vandalism, explosion, hazardous spills, or wayward vehicle and aircraft crashes.
Floods, earthquakes, and landslides are some events not usually covered by a standard policy. These types of natural disasters are particularly destructive and require an additional add-on or separate policy. Business owners that operate in areas with a high risk of those types of natural disasters—flooding in particular for Texas—should be aware of this limitation and make sure they have the coverage necessary for their situation and business.
Business interruption insurance also typically does not cover disasters related to human health, like viruses, bacteria, or pandemics. That is because health-related disasters do not often meet the standard of causing physical damage to some tangible property (although it could in the right circumstances, if actively present on the premises).
This means that, if business ceases or slows due to COVID-19 or whatever new pandemic might arise in the future, a standard business interruption policy will not apply to give you any protection for the loss. Some all-inclusive policies might have specific coverage for viruses or bacteria, but these are outside the norm and will likely become less available in the future (or else far more expensive).
What losses are paid when coverage applies?
When business interruption insurance is triggered, the types of losses that may be paid can include:
- Lost income – Every business interruption policy reimburses for a loss of net income (not the gross income). This is a crucial aspect that allows a company to stay afloat during temporary setbacks that otherwise might force one to permanently close their doors.
- Payroll – Even though forced to temporarily shut down, most businesses want to maintain their workforce so they can be in a position to seamlessly get back on their feet as soon as possible. The insurance will continue to pay salaries and wages until the business can start generating revenue itself again.
- Rent or Mortgage – A business that leases space or other premises for its operations will usually still be obligated to pay the landlord (or its mortgage if owning the property) despite an inability to continue business. The insurance pays rent or mortgage payments while you work to reopen the business.
- Loans – As with a landlord, the bank or other lender from whom you received money prior to a shutdown will expect to be paid back on time regardless of your situation. This is where business interruption insurance also kicks in to make sure you do not miss your loan or debt payments.
- Taxes – Except for the most wide scale disasters, you can be assured the government (federal, state, and local) will still be collecting taxes as usual when they come due. Business interruption insurance helps there too.
- Relocation Expenses – Most policies cover the costs to move your business to a new location as well, either temporarily or permanently. That includes the movers, leasing a new space, renting equipment, related overtime costs, hiring new employees if necessary, and providing them training also.
Proving your loss of income or reasonable expenses requires documented financial records to demonstrate your pre-disaster operations. When there is a dispute or you are being shortchanged by an insurance adjuster, that means getting a qualified financial, business, or economic expert involved to establish the proper amount of loss.
How long will payments be made?
The coverage is called business “interruption” insurance for a reason. It is meant to be a temporary bridge that gets a business back on its feet. The coverage thus does not apply to minor stoppages nor will it pay out the entire value of a destroyed business.
In other words, there are limitations on both ends of the coverage. Your policy will require operations first be shut down by a covered peril for some minimum length of time before payment begins: 48 hours, 72 hours, or a number of days. The maximum amount can vary far more greatly depending on the policy. Some may provide only a few weeks or months of payments, while others cover up to an entire year, 18 months, or even longer with a dedicated policy (and higher premium of course).
No matter the length of time benefits are available to be paid, they will cease as dictated by the “period of restoration.” That is defined as the earlier of (i) the reasonable amount of time it takes to repair, rebuild, or replace your damaged property, or (ii) the date when business actually resumes at a new permanent location.
Know your policy and rights
Business interruption policies can be difficult to navigate. While coverage can make a huge difference in continuity after a disaster, interpretation of the policy often leaves insurers and business owners at odds, which can lead to disputes in court.
If you are fighting with your insurance company over business interruption coverage, it is important to work with an experienced litigation attorney who can help you document the case and build a strong argument for the losses. It may be smart also to have an attorney review your policy before it ever becomes necessary to make a claim, so you know the situations in which your business is (and is not) covered.
Wright Commercial Litigation represents policyholders in all types of insurance disputes, often on a contingency or hybrid fee basis, including those dealing with business interruption policies, riders, or endorsements. Contact the firm here to request a consultation to discuss your situation and see if the firm can help you on a contingency or reduced fee hybrid basis.