Not-so-fun fact: Two out of three businesses go belly-up after making an insurance claim if they don’t have business interruption insurance in place. Safe to say, it’s an important commercial insurance coverage to have. Here, we’re explaining exactly what business interruption insurance covers, why you need it, and how to make a claim.
In simple terms, business interruption insurance is a coverage that protects your business from financial losses resulting from a temporary suspension of operations.
And as far as we’re concerned, if you have a business, you need business interruption insurance.
That said, as business insurance brokers, we may be a bit biased. 😉
So, to back up our claims, we’re explaining everything you need to know about business interruption coverage in this blog post.
That way, you can decide for yourself if it’s worth it.
Or, if you’d like to speak to one of our brokers directly, we’d be happy to help.
Just give our commercial insurance brokers a call.
Skip ahead to learn what you need:
- What is business interruption insurance?
- What does business interruption insurance cover?
- How does business interruption insurance work?
- What happens if I don’t have business interruption insurance?
- Are there different types of coverages?
- How long does the coverage last?
- How to make a business interruption insurance claim
What is business interruption insurance?
Let’s start with the basics: What is business interruption insurance?
Business interruption insurance is a coverage that protects businesses from financial losses resulting from a temporary suspension or slowdown of operations.
As long as the reasons for your business being on pause are covered under your policy, it can protect you financially.
Think about it: What might happen if your business had to grind to a halt?
You’d lose out on weeks – or even months in some cases – of regular business revenue.
And that would be a disaster for most companies, which is why this coverage is so important.
It’s designed to help your businesses recover in the event of claimed perils, and pay for things like:
- Lost income
- Ongoing expenses (salaries, rent, utilities, loan payments, taxes)
- Relocation costs
- Maintaining your financial stability during the interruption period
We’ll explain this in more depth below. 👇
What does business interruption insurance cover?
In Canada, business interruption insurance kicks in if you experience a covered loss on your property insurance policy. Fire, natural disasters, and vandalism are common coverages you’ll find on a commercial insurance policy.
Here are the factors that business interruption typically covers:
- Lost Income: It helps compensate for the net profits a business would have earned if the interruption had not occurred.
- Ongoing Expenses: It typically covers fixed expenses that continue even when business operations are temporarily halted. This includes rent, utilities, employee salaries (referred to as ordinary payroll), loan payments, and taxes.
- Relocation Costs: If the insured premises are damaged and the business needs to temporarily relocate, it may cover the costs associated with moving to and operating from a new location.
- Extra Expenses: The policy may reimburse additional expenses incurred to minimize the loss or to get operations running again (anything over your day-to-day operating costs). This can include costs for temporary equipment rentals, expedited shipping, or hiring additional staff.
In short, the policy provides compensation for the profits that would have been earned had the interruption not occurred, as well as additional expenses incurred to minimize the loss.
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How does business interruption insurance work?
Business interruption insurance is designed to provide financial protection to businesses when they experience a temporary interruption of their operations.
Here’s how it typically works:
- Incident and coverage trigger: The coverage is triggered when a covered peril, such as fire, natural disaster, or other specified events, causes damage to the insured property, resulting in a business interruption.
- Business income loss calculation: With business income insurance, the insurer assesses the financial impact of the interruption by evaluating the business’s financial records, including revenue, expenses, and profits. The coverage aims to compensate for the net income the business would have earned during the interruption period.
- Coverage period: The policy specifies the duration of coverage, usually starting from the time of the incident until the business is fully operational again and profits have returned to what they were prior to the loss.
Pro tip: As a rule of thumb at KBD, we generally give 35% of the company’s annual revenue as an amount to cover your business interruption limits.
So for example, if your business has $1M in annual revenue, we would suggest taking $350k as a business interruption limit to cover your loss of profits, fixed costs and administrative payroll.
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Do I need business interruption insurance in Canada?
Determining whether you need business interruption insurance in Canada depends on – as usual – several factors.
One of the biggest factors to consider is this: Can your business afford to be out of commission for any period of time?
More than that, would you want to pay out of pocket for loss of revenue, and ongoing expenses if this were to occur?
Here are some additional considerations to help you make an informed decision:
- Risk assessment: Evaluate the potential risks your business faces, such as natural disasters, fire, or other perils that could disrupt your operations.
- Financial stability: Assess your business’s financial resilience and its ability to sustain a temporary shutdown without significant financial strain. Can you afford to cover ongoing expenses and loss of income during an interruption?
- Business continuity planning: If your business heavily relies on physical assets, inventory, or specialized equipment, business interruption insurance can provide critical support to help you resume operations swiftly.
- Client dependencies: Consider the impact an interruption would have on your customers. Will it lead to reputational damage or the loss of key clients?
Note: Business interruption insurance is always bundled with commercial property insurance policies or included as an endorsement. You cannot purchase a stand alone business interruption policy.
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Are there different types of coverages?
In Canada, business interruption coverage is offered by various insurance providers, and the terms can vary.
Here are some of the common types of business interruption coverages:
- Business income insurance: This policy covers the loss of income that a business sustains after a covered loss, such as fire or flood. It typically includes coverage for ongoing expenses, payroll, and relocation costs during the interruption period.
- Contingent business interruption insurance: This coverage provides compensation when a supplier, distributor, or customer experiences a covered event that leads to a business interruption for the insured company.
- Extended business interruption insurance: This type of policy extends the coverage period beyond the initial restoration period. It helps businesses recover from the effects of an interruption that extends beyond the time required to restore physical damage. In other words, the coverage pays out until your business’ revenue returns to what it was prior to the insurance claim.
- Extra expense insurance: Reimburses you for expenses incurred to minimize or avoid a business interruption. It includes costs associated with temporary relocation, equipment rental, overtime wages, etc.
- Dependent property insurance: Protects businesses that rely on other locations or properties to generate income. It covers losses resulting from interruptions at the dependent properties, such as an adjacent building that drives foot traffic to the insured business.
- Civil authority coverage: This compensates a business for losses when access to its premises is prohibited or limited by a government authority due to a covered event, like a natural disaster. It helps cover the income loss during the period of restricted access.
Consult with your broker to understand the details and tailor your coverage to your needs.
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Our commercial insurance brokers would be happy to help.
How long does business interruption insurance last?
If you’re a Canadian business owner, you should establish this timeline with your insurance provider, as it varies.
Typically, business interruption insurance provides coverage for a specific period known as the “indemnity period.”
This is the maximum length of time that the insurer will compensate the insured business for losses due to a covered interruption.
Review your policy to understand the duration of coverage provided by your insurance.
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What happens if I don’t have business interruption insurance?
If you don’t have business interruption insurance, you’re taking a big risk.
Without this coverage in place, you won’t be able to claim compensation for income losses, ongoing expenses, or additional costs incurred during a business interruption.
This could leave your business vulnerable to financial strain, bankruptcy, and a prolonged recovery period.
If you’re a business based in Ontario or Quebec, we can help get you insured. 😎
How to make a business interruption insurance claim?
Need to make a business interruption claim?
Follow these steps:
- Review your policy: Familiarize yourself with your business interruption insurance policy. Understand the coverage, policy limits, deductibles, and any specific requirements for filing a claim. Ideally you would do this before you experience a covered event.
- Notify your broker: Contact your insurance broker as soon as possible to report the interruption and start the claims process. Provide information about the incident, including the date, cause, and extent of the damage. If you are insured with KBD, you can visit our claims page here.
- Document losses: Keep records of all financial losses incurred during the interruption period. This includes gathering evidence of lost income, ongoing expenses, and additional costs related to the interruption.
- Provide supporting documents: Prepare supporting documentation, such as financial statements, profit and loss statements, tax returns, and any other relevant records to substantiate your claim. The forensic accountant assigned by the insurance company will ask for this information as well.
- Mitigate losses: Take reasonable steps to mitigate further losses. This might mean implementing temporary measures to resume operations, finding alternative locations, or minimizing ongoing expenses.
- Review settlement offer: Once the insurer has reviewed your claim, they’ll provide a settlement offer. Review the offer to ensure it covers your losses and expenses.
Consult with your insurance provider throughout the claims process to maximize your chances of a successful claim.
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All this to say, business interruption insurance is important.
It can be the difference between your business going under and staying afloat.
Consider it a responsible investment in the longevity of your company. 😉