In the world of business, unforeseen events can disrupt operations and severely impact your financial stability. Fires, thefts, and other unexpected events can bring business to a halt, leading to significant revenue losses.
That’s where business income insurance comes in. Business income insurance, also known as business interruption insurance, helps cover the loss of income when your business can’t operate due to a covered peril. By helping to cover the revenue the business would have earned if it were operating normally, business income insurance can help cover operating expenses, such as rent, payroll, and utility bills, during a period of interruption.
This blog examines the different types of business income insurance, what they cover, and what you should know when you’re choosing a policy.
What Business Income Insurance Coverage Options Are There?
There are several types of business income insurance coverage options to help protect your business from financial losses. Here are some common options:
- Standard Business Income Coverage: Covers lost income and operating expenses during the period your business is closed due to a covered peril, such as fire or theft.
- Extra Expense Coverage: Covers additional costs incurred to minimize the suspension of operations, such as renting temporary space or expedited shipping of replacement inventory.
- Extended Business Income Coverage: Provides coverage for lost income even after your business reopens, helping to cover the period of reduced income as your business recovers.
- Service Interruption Coverage: Covers losses due to interruptions in essential services like electricity, water, or gas.
- Contingent Business Interruption (CBI) Coverage: Covers losses due to interruptions at a key supplier or customer’s location.
- Civil Authority Coverage: Covers losses when a government authority restricts access to your business premises due to a covered peril.
These options can be tailored to fit the specific needs of your business.
What Does Business Income Insurance Cover?
Business income insurance typically covers items such as operating expenses, business restoration costs, losses due to service interruptions, and lost income you would have earned if your business were operating normally. However, exactly what’s covered by your business income insurance varies depending on the type of coverage you choose and the details of your particular policy. Let’s examine some particulars more closely.
Events Covered by Business Income Insurance
Business income insurance typically covers a range of events that can disrupt your business operations. Here are some commonly covered events:
- Fire: Damage caused by fire is one of the most commonly covered events.
- Windstorms: This includes damage from hurricanes, tornadoes, and other severe wind events.
- Theft and Vandalism: Losses due to theft or vandalism are generally covered.
- Hail: Damage caused by hail storms is another common area of coverage in many regions.
- Vehicle or Aircraft Damage: This includes incidents where vehicles or aircraft cause damage to your business property.
- Civil Authority: This covers losses when a government authority restricts access to your business premises due to a covered peril.
It’s important to note that business income insurance usually does not cover losses due to floods, earthquakes, or pandemics unless specifically added to the policy.
Expenses Covered by Business Income Insurance
Business income insurance covers a variety of expenses to help keep your business afloat during a covered interruption. Here are some of the key expenses it typically covers:
- Lost Net Income: The income you would have earned if your business were operating normally.
- Employee Wages and Payroll: Funds to ensure you can continue to pay your employees during the interruption.
- Mortgage, Lease, and Rent Payments: Ongoing obligations for property payments.
- Loan Payments: Funds to keep up with loan repayments.
- Taxes: Money to cover your tax obligations during the period of interruption.
- Routine Bills: Utilities and other regular operating expenses.
- Extra Expenses: Costs incurred to reduce downtime, such as renting temporary space or expedited shipping of replacement inventory.
These coverages can be crucial in helping your business recover from unexpected disruptions.
What Is NOT Covered by Business Income Insurance?
Business income insurance, while comprehensive, does have certain exclusions. Here are some common events and expenses that typically aren’t covered:
- Floods: Damage caused by flooding is usually excluded unless you have a separate flood insurance policy.
- Earthquakes: Similar to floods, earthquake damage is generally not covered unless you have specific earthquake insurance.
- Communicable Diseases: As many business owners discovered during the Covid-19 global pandemic, losses due to pandemics or other communicable diseases are typically excluded.
- Undocumented Income: Any income that cannot be documented or verified is not covered.
- Gradual Reductions in Sales: Losses due to a gradual decline in sales not caused by a covered event are excluded.
- Advertising and Marketing Expenses: Costs related to advertising and marketing campaigns are not covered.
- Downed Power Lines: Losses due to power outages from downed power lines are generally not covered unless they cause direct physical damage to your property.
Understanding these exclusions can help you better prepare and consider additional coverage options if needed.
Who Needs Business Income Insurance?
Business income insurance can be a crucial safety net for any business that could face significant financial losses from unexpected disruptions. It’s beneficial for a wide range of businesses, especially businesses that rely on physical locations (such as brick-and-mortar retailers, restaurants, and in-person service providers, like salons and barbershops) and businesses that rely on equipment (such as manufacturers or contractors).
Business income insurance is also vital for small and midsize businesses that may not have the financial redundancy of larger companies and can be more vulnerable to interruptions.
How Much Business Income Insurance Do I Need?
Determining the right amount of business income insurance involves a few key considerations. Here’s a general guide to help you calculate how much you might need:
- Project the amount of income your business is expected to generate over the next 12 months. This includes all sales and services.
- Add up all ongoing expenses, such as rent, utilities, payroll, loan payments, and taxes.
- Estimate the amount of time it would take to repair or replace your business property and resume normal operations after a loss. This period is known as the “restoration period.”
- Many insurers provide business income worksheets to help you calculate your business income exposure. These worksheets guide you through the process of estimating your income and expenses.
By combining these factors, you can determine a coverage limit that reflects your business’s financial needs during an interruption. It’s also a good idea to review your coverage annually and adjust it based on any changes in your business operations or revenue projections.
How Much Does Business Income Insurance Cost?
On average, small business owners might pay around $57 per month or $684 annually for a business owner’s policy, which often includes business income insurance. However, the cost of business income insurance can vary widely based on several factors, including the size of your business, the industry, your location, and the specific coverage options and deductibles you choose. It’s a good idea to get quotes from multiple insurers to find the best coverage and price for your specific needs.
Is Business Income Insurance Worth It?
Business income insurance is often a valuable investment for many businesses, especially those that rely heavily on physical locations or equipment to generate income. Here are some reasons why it might be worth it:
- Financial Protection: It provides a financial safety net during unexpected interruptions, helping to cover lost income and ongoing expenses like payroll, rent, and utilities.
- Peace of Mind: Knowing that you have coverage in place can reduce stress and allow you to focus on rebuilding your business after a disruption.
- Business Continuity: It helps ensure that your business can continue to operate or quickly resume operations after a covered event.
- Customer and Employee Retention: By maintaining operations and paying employees during a disruption, you can retain your customer base and workforce.
However, the decision to purchase business income insurance should be based on your specific business needs, risk exposure, and financial situation. For some businesses, especially those with low overhead or minimal physical assets, it might not be as critical.
Business Income Insurance FAQs
Here are answers to some other commonly asked questions.
What’s the Difference Between Business Income Insurance and Business Interruption Insurance?
Business income insurance and business interruption insurance are actually the same thing. The terms are often used interchangeably to refer to coverage that helps replace lost income and pay for ongoing expenses when your business is unable to operate due to a covered event, such as fire, theft, or other disasters. So, whether you see it referred to as business income insurance or business interruption insurance, it provides the same essential protection for your business.
Is Business Income Insurance Covered in a Business Owner’s Policy?
Business income insurance is often included in a Business Owner’s Policy (BOP). A BOP typically bundles several types of coverage into one package, such as property insurance (which covers damage to your business property) and general liability insurance (which protects against claims of bodily injury or property damage caused by your business operations). Including business income insurance in a BOP can be more cost-effective than purchasing each type of coverage separately.
Does Business Income Insurance Have a Deductible?
Business income insurance typically does not have a monetary deductible. However, it often includes a waiting period before coverage begins, usually ranging from 24 to 72 hours after the covered loss occurs. This waiting period acts as a time-based deductible, meaning you won’t receive coverage for losses incurred during this initial period.
How Do I File a Claim for Business Income Loss?
There are several steps to ensure you receive the coverage you’re entitled to when you file a claim for business income loss. Here’s a general guide to help you through the process:
- Review Your Policy: Start by reviewing your business income insurance policy to understand what is covered and any specific requirements for filing a claim.
- Notify Your Insurer: Contact your insurance provider as soon as possible to inform them of the loss. Provide details about the event that caused the interruption.
- Document the Loss: Gather and document all relevant information, including financial records, receipts for extra expenses, and any other evidence of the loss. This may include:
- Complete the Claim Form: Your insurer will provide a claim form. Fill it out with detailed information about the loss, including the date and extent of the interruption.
- Submit Supporting Documentation: Along with the claim form, submit all supporting documentation to your insurer. This helps substantiate your claim and speeds up the process.
- Work with the Adjuster: An insurance adjuster may be assigned to your case. Cooperate with them and provide any additional information they request.
- Follow Up: Keep in regular contact with your insurer to track the progress of your claim and address any questions or concerns that arise.
By following these steps, you can help ensure a smoother claims process and increase the likelihood of a successful outcome.
Have Questions About Business Income Insurance? Contact Merlin Law Group
Navigating the complexities of insurance claims can feel overwhelming. Whether you’re facing unpaid claims or simply filing for the first time, our eBooks equip you with the crucial information you need to advocate for yourself with confidence.
If you’re fighting an insurance company that won’t pay up on claims, Merlin can help. With nearly 40 years of practice and $2 billion in recovered claims, our team stands by your side to ensure you can face any insurance challenge with confidence. Contact us today for a consultation, or read more about how we’re your trusted advocate.
