Business Interruption Explained
When a business owner takes out an insurance policy, they know that they need to cover their building and contents so that they can be replaced if there is a fire or flood. Unfortunately, these repairs won’t happen overnight! So, what happens to the business while it is shut down? In the case of a restaurant, for example, this could end up being very costly since without customers coming in to eat, the business cannot generate revenue. Luckily, this is where business interruption insurance comes in.
Business interruption is included on most commercial policies. It acts alongside the direct damage coverage which protects the business’ property. First, it covers a business’ fixed costs, like mortgage payments or rent. Next, it covers the administrative salaries, which in case of a restaurant could be the head chef and manager. There is also an option to include all salaries or “ordinary payroll” for a certain period of time, usually 90 days. Last, it covers loss of profits during the period the business is closed.
While many people may think that the amount of coverage needed for business interruption would be the entire amount of the revenue, this actually isn’t necessary. The reason for this is because there are some costs that a business won’t have while they are shut down. If we take a restaurant again, during the period they are not open, they won’t be spending money on food or alcohol to be served, the electricity bill will likely be much lower, and they will not be paying certain staff members unless “ordinary payroll” is included in the coverage. This is why the amount shown for business interruption on an insurance policy is less than the total annual revenue.
Other types of businesses, an insurance broker like KBD for example, would be able to get back up and running fairly quickly in another temporary office after a fire or flood. For these businesses, there is a type of business interruption coverage called “extra expense”. This covers a company’s costs over and above their normal operating expenses. These are things like higher than normal rent in the temporary office, costs to redirect phone lines, and costs to notify customers of their new location. This can also be added to policies alongside traditional business interruption coverage.
Business interruption coverage is extremely important to have, since being closed for an extended period of time without income can put significant financial strain on a business which can even result in bankruptcy. Having either traditional business interruption coverage or extra expense coverage gives business owners the peace of mind that even if they have a claim, the bills will still be paid. If you’re not sure which coverage is right for your business, give us a call and we can help you choose the right protection!