Business Interruption Insurance and How It Works

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Does your policy include business interruption insurance? A business interruption is not something you want to think about. But a disaster could close your doors in an instant. Are you prepared and protected if you shut down temporarily if a disaster strikes?

Flooding, weather damage, fires, power outages and even vandalism could force you to close. These factors could cause you to lose out on sales and revenue. Can you survive an interruption in business? Most can’t.

It is estimated that 40% of businesses don’t recover after a disaster. 25% fail in the first year after a disaster.

Business interruption (BI) insurance helps you cover loss of income. It helps you get back to business as usual when a disaster strikes.

Top things to know about business interruption insurance

Business interruption insurance is additional coverage that helps support you if you are forced to close down because of unforeseen circumstances.
Many businesses fail to re-open after an interruption. BI coverage can provide the financial stability you need during trying times.
Business interruption helps you recover lost income and cover expenses while you are shut down.

What is business interruption insurance?

Business interruption (BI) insurance covers you against the loss of income you may suffer if you are forced to close your doors. Coverage kicks in if you must close temporarily after a disaster event.

You will receive compensation to provide you with the revenue you would have received if you were running as usual. You will also have protection for normal day-to-day operating expenses.

It is also referred to as loss of business income insurance. It helps you recover lost revenue and cover expenses. You can add this to an existing policy or as an add-on. It may be part of a comprehensive plan.

Do I need business interruption insurance?

Most businesses should put serious thought into getting this type of insurance. You never know when an unexpected event or disaster could occur and cause you to shut down.

Without it, you will lose revenue for you are not operating every day. Repairing and restoring your property after a disaster could take weeks or months. Every day that you are closed results in more lost revenue. Plus, you still have to pay the bills, your employees, and account for other expenses.

All organizations, especially new companies, start-ups, and SMBs, can benefit from it. Smaller establishments are less equipped and need to be financially stable enough to withstand a disaster, causing a sudden closure.

Newer companies typically have more difficulty recovering after a disaster or loss event. They are more likely to close after a loss if they do not have business interruption insurance.

What is the most common type of business interruption?

There are many things that can interrupt business operations. But there are two main threats that top the list:

Fire: Even a small fire can potentially shut down a business for days or weeks. It only takes a few minutes for a business to go up in flames and experience significant damage.
Water: This is one of a business owner's biggest enemies. There are many ways that water can cause damage, such as a burst pipe, flood, significant rainfall, or leak.

Examples of business interruptions

Any company with a physical location could have an interruption. It helps to protect you against loss events. Here’s a list of things that are most likely to cause a business interruption:

Fire and explosion
Water damage
Power outages
IT and website problems
Cyber hacking
Natural disasters
Machine and equipment failure
Supplier issues

You can also get protection from other unexpected events that hurt your operating ability. Examples include :

A fire at your top supplier’s warehouse.
A top customer experiences a disaster, preventing them from buying from you.

How to get business interruption insurance

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Types of business interruption insurance coverage

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Business interruption insurance has flexible solutions. Choose the coverage to add to your Ontario small business insurance policy that makes the most sense. Options include:

Named perils : This covers losses named as part of business interruption.
All risk : This covers any threats that are not specifically excluded. It is also referred to as actual loss of income. It pays up to the actual loss amount.
Limited indemnity : This provides you with resources until you resume operations.
Extended indemnity : This provides assistance until your business returns to its normal, pre-disaster, level of operations.
Contingent business interruption : You are unable to operate because of a disaster to your suppliers or customers, preventing you from generating sales.
Additional expense : Get resources for extra expenses such as outsourcing work, temporary rentals and locations.

What is covered by business interruption insurance?

There are four main financial areas where this coverage helps:

Lost net income : You will get compensation for the profits you would have earned. The previous month’s financial statements set the amount.
Operating expenses: You will be compensated for accumulated fixed operating costs, such as rent, mortgage, and hydro.
Payroll : You will get compensation to cover payroll.
Temporary location : Some policies cover the cost of moving to and setting up a temporary location.

What is not covered by business interruption insurance?

BI Insurance does not cover all expenses. Here are some of the events where it is not applicable:

Terrorism
Pandemics or infectious diseases, including COVID-19
Floods
Earthquakes
Pollution damage
Recovery of income not on your financial records

Business interruption insurance calculation

One of the most common questions we receive from our clients about business interruption coverage is, how is business interruption insurance calculated? Losses from a business interruption are more challenging to calculate than physical loss. There are some intangibles to consider. There are also different methods to calculate loss based on your business type, industry, and other considerations. Business interruption calculations can get complex. Here’s a simple BI calculation to help you understand how it works:

Lost income + Payroll + Operating expenses + Additional expenses = business losses from interruption

Lost income: Based on the average revenue. Consider seasonal revenue changes and the impact the closure has on potential future revenue.
Payroll: The cost to pay your employees, including benefits.
Operating expenses: The cost of normal operating expenses
Additional expenses: Additional costs of setting up a temp location, repairs, communications, marketing, and additional payroll.

You will be expected to show proof of loss. Compensation for loss will be based on your coverage and up to your policy limits.

Note: This is a basic example for illustrative purposes. Insurers may use different methods to measure business interruption loss and compensation.

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Business interruption insurance FAQs

How does business interruption insurance work?

It comes into effect when you are forced to close your doors. Contact your insurance expert to open a claim. Once enacted, you will get a reimbursement for operating expenses and lost income. You will have to show proof of revenue and expenses.

You will be subject to coverage and time limits as outlined in your policy. Payments will stop once you are back up and running or meet your policy limits. Understand what is and is not part of your plan.

How much does business interruption insurance cost?

BI insurance is based mainly on your revenue. It will also vary based on the size and type of business, plan limits, and other factors. This includes:

Policy type
Covered perils
Your insurer
Potential threats
Number of employees

Premiums can start as low as $100 per year for an add-on endorsement. Speak with our advisors today to compare quotes. We will help you find a custom solution to meet your unique needs and fit your budget.

What types of companies need business interruption insurance?

Companies of all types and sizes in all industries can benefit from business interruption insurance. Custom options are available to meet your specific insurance needs. There are plans available for everything from small agencies to SMBs and large enterprises.

Is there a business interruption insurance deductible?

It depends. Some policies include a deductible. The amount will vary depending on your insurer and other factors.

Does business interruption insurance cover payroll?

Yes. You can choose a plan that includes payroll coverage. This will ensure your employees get paid while your business operations are disrupted.

What is the waiting period for a business interruption claim?

Most policies have a 72-hour waiting period for business interruption insurance to kick in. You cannot start recovering lost income until after meeting the 72-hour closure threshold.

Is there an indemnity period for business interruption insurance?

Yes. The indemnity period is the amount of time you will be compensated. Most policies offer a 12 month indemnity period. But this period could be extended based on the time needed to get back up and running.

The duration period depends on your insurer and will be outlined in the policy.

Does business interruption insurance cover a pandemic?

This insurance is designed to cover physical loss or damage. It does not cover revenue lost due to pandemics, government closures, or infectious diseases.

Tips to prevent and prepare for business interruption

Two women are looking at products in a shop

You can’t always control what happens to your business. However, you can prepare for disasters and other loss events that could impact your ability to operate. Taking precautionary steps now can help you quickly recover from a disaster.

Add business interruption to your insurance : Add it to your policy to provide you with additional financial protection.
Understand the threats that could shut you down : Be aware of what poses a threat and make sure you have coverage to offset the effects.
Have a contingency fund : Stash away some money. Create a source of money you can draw from in the event of a disaster.
Create a continuity plan : A continuity plan will help you be more agile. It will also allow you to recover quicker and limit the effects of a disaster.

Get a quote for business interruption insurance

Are you protected if you are forced to shut down? Financially protect your organization with business interruption insurance. Speak with a ThinkInsure expert today.

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Business Interruption Insurance

Protect your revenue and income with business interruption insurance.