Alex Brown: Why Your Company Needs Business Interruption Coverage (Business Income Insurance)

Hundreds of thousands of businesses temporarily shut down across the United States in March 2020.

More than 18 months later, many of them remain closed. Most of these still-shuttered enterprises won’t reopen — about 200,000, according to a Wall Street Journal report.

Businesses fail all the time, but the failure rate has been exceptional since the onset of the COVID-19 pandemic. Many entrepreneurs in the hardest-hit sectors, like food service and entertainment, decided to cut their losses rather than adjust to what could be years of uncertainty to come.

Most of the survivors benefited from state and federal business assistance programs enacted or expanded in response to the pandemic, like SBA Economic Injury Disaster Loans and the Paycheck Protection Program. Many had another tool at their disposal as well: business interruption insurance, also known as business income insurance.

What Is Business Interruption Coverage?

Business interruption coverage helps protect policyholders from income loss due to circumstances outside their control. Historically, these circumstances have been more localized than a global pandemic; think wildfires or civil unrest. In fact, many business interruption insurance policies specifically exclude losses due to viral disease. Case law remains unsettled.

Let’s set aside the question of whether business interruption coverage protects business owners from losses related to the COVID-19 pandemic and look ahead to potential future disruptions. Is this type of insurance worthwhile for the average business owner?

Benefits of Business Interruption Coverage

As is often the case on insurance-related matters, the answer is “it depends.” But business interruption insurance does have clear benefits for policyholders, including:

1. It Helps Replace Revenue Lost Due to Covered Business Closures

Unlike some other forms of commercial insurance, business interruption coverage doesn’t merely reimburse expenses already incurred. It provides financial protection against revenue loss.

This coverage isn’t absolute. The insured business must be prepared to prove that any claimed revenue loss occurred due to an event covered by the policy. And some policies limit revenue reimbursement (or offer the option to limit revenue reimbursement in exchange for lower premiums) by capping benefits or requiring coinsurance payments.

2. It Helps Cover Business Expenses You Can’t Avoid Incurring During a Covered Closure

These expenses may include but aren’t limited to tax payments, loan payments, rent or lease payments, and payroll. While government assistance programs (such as disaster loans) and private support (like loan forbearance) may help with specific types of expenses incurred by businesses forced to close for reasons beyond their control, filing a business interruption insurance claim may be less complicated than applying for a disaster loan or negotiating the terms of a loan deferment.

3. It May Cover Temporary Relocation Expenses and Related Costs

Business interruption insurance may cover expenses incurred in relocating to a new or temporary place of business. These expenses can add up quickly for larger enterprises with lots of inventory to move and substantial space requirements.

Business interruption insurance may also provide coverage for expenses indirectly related to relocation as well, such as retraining costs for employees who must learn to use new equipment or navigate new workflows.

4. It Can Pay Out for 12 Months or Longer

Business interruption insurance is best thought of as a short-term solution or bridge for businesses temporarily affected by circumstances beyond their control. But “short-term” is open to interpretation. Most policies pay out for at least 12 months after an initial two- or three-day waiting period; some remain effective for 18 to 24 months following a claim. A relatively long effectiveness period is a lifeline for businesses badly affected by covered perils that necessitate extensive repairs or drawn-out searches for new business locations.

5. It’s Often Bundled With Other Types of Business Insurance

Business interruption insurance is frequently bundled with other types of commercial insurance, including:

• Commercial vehicle insurance for fleet vehicles driven on public roadways
• General liability insurance, which may cover claims arising from injuries to third parties, property damage caused by the covered business or its representatives, and certain types of legal action taken against covered businesses
• Cybersecurity insurance (data breach insurance), a newer type of coverage that protects businesses against the financial consequences of cyberattacks

Commercial insurance bundles may reduce the unit cost of insurance and allow enterprises to secure adequate protection as they scale. The hope is that covered businesses never have to test their insurers’ willingness to cover claims, of course, but that’s probably wishful thinking.

So, are you sold on business interruption coverage? Or are you willing to take your chances and go without?