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Business Interruption Insurance

Business interruption insurance compensates a business for certain specified categories of costs in the event of catastrophic events. Three categories that may be covered are 1) profits that would have been realized if the disaster had not occurred; 2) operating expenses that must be paid despite inability to operate; and 3) expenses incurred because business operations had to be moved while damaged original premises were restored for use. This type of protection is also known as business income protection, profit protection, and out-of-business coverage. Freestanding business interruption policies are rarely sold.

They tend to be provisions that are part of property insurance policies and so-called “business owners policies” (BOPs).

What is Covered Interruption insurance clauses are not uniform. Clauses that trigger coverage may be limited by category and further delimited within the category.

Excluded categories may include public unrest or riots; water damage or flooding; firestorms, tornadoes, or simply “storm damage”; earthquakes; and war and terrorist acts. The business owner is well-advised to review such clauses to ensure that he or she is covered. Exclusions may be present because the business is located in an area such as a flood plain or in some location where annual firestorms are common. Coverage for such events, of course, will tend to be costly.

In the modern electronic environment, interruptions in Internet services or hacker attacks may interrupt or severely damage a business that depends significantly on Web trade or, for instance, is involved in software development for others. Such businesses should be especially careful to ensure that disruptions from such sources are covered.

Record Keeping and Security In many cases a business must have good records to collect on such a policy. It may have to prove, for instance, that it has actually earned profits, at a particular level, in the year preceding the catastrophic event; it may similarly have to document its operating expenses. If records are burned or destroyed in a flood, collection of amounts due may be problematical. For this reason those purchasing business interruption insurance should implement policies to keep copies of records at locations other than the main business site. Carol Schroeder, writing in Gifts & Decorative Accessories, described a minimum policy: “[A] backup copy of your computer files should routinely be stored off-site. Our bookkeeper keeps a zip disk of financial data in the trunk of her car, and once a week she brings it in to make a copy of the latest numbers. That’s somewhat low-tech, but it works! Those who keep records on paper should keep copies at home, or store them safely elsewhere. You may also want to take photos of your shop’s exterior and interior in case you ever file a claim.”

Keeping Coverage Up to Date Insurance policies tend to be forgotten after they are purchased; they will cover the business status as it was at the time of purchase—but in the meantime the business may grow. Schroeder provides another example: “[I]f you wrote the policy when your inventory was valued at $100,000, you may not be fully covered if you have $200,000 in stock. Also find out if the coverage for your furniture, fixtures, and building (if you own it) reflect[s] their current value.”

Other Related Coverage Business interruption insurance can also provide a small business with income protection in the event an accident or injury causes the disability of an owner or key employee. This type of policy is usually combined with basic individual disability coverage. Basic disability benefits generally begin one month to one year after the onset of the disability, can last between two years and the remainder of the person’s life, and pay between 60 and 70 percent of the individual’s usual income during the period when he or she is unable to work. Though this type of policy is important to help an owner or key employee cover living expenses, additional benefits—in the form of a business interruption insurance policy—are often needed to keep the business running in his or her absence.

Yet another type of insurance that fits into this category is called extra expense insurance. Such insurance, sometimes used in lieu of business interruption insurance, reimburses a business owner for special expenses incurred, over and above normal operating costs, to keep a business from shutting down during a period of recovery from a disaster.

Continuity Programs Small business experts urge entrepreneurs to research their options in the realm of business interruption insurance and select the one that works best for them. But they also caution small business owners that such policies, while extremely valuable in terms of preserving the financial viability of an enterprise, are often not, in and of themselves, sufficient to keep a business afloat during difficult times. Business interruption insurance should be only one element in an overall “business continuity” program. These programs, which can be developed in conjunction with many insurers, seek to address all company functionalities in the event of a business interruption. Their principal aim is to help the company resume operations in as timely and efficient a manner as possible. Interruption insurance is usually the cornerstone of such programs, but it is hardly the only element. Business continuity programs also seek to minimize a company’s financial and operational vulnerabilities and protect its customer base, work force, and assets in the event of an interruption. They also help companies adopt training programs and preventive policies to minimize the likelihood of a business interruption in the first place.

Events such as the terrorist attack in September of 2001 and the Katrina and Rita hurricanes of 2005 acted as wake-up-calls for businesses large and small.

Thoughtful entrepreneurs will keep a checklist handy to remind them, even in quiet times, to give thought, occasionally, to the completely unforeseen.