Many owners of small- and medium-sized businesses have “Business Interruption” (BI) coverage in their commercial insurance policies. But we often hear from business owners who aren’t fully sure what BI is exactly, or how it comes into play in the event of a property loss suffered by their business.
The question they most frequently ask: Why do I need BI coverage?
The answer we always provide: Because it makes you whole – restoring you financially to a position as if you had not suffered any loss at all.
Basically, BI compensates you for lost profits. After all, if your business burns down, you won’t have customers coming in. And if you don’t have any customers coming in, you can’t get paid. BI accounts for that shortfall.
So, if your business has a catastrophic event, and it’s covered by your insurance policy, BI pays for lost net income and expenses incurred while you undertake reconstruction.
Imagine your business has a major fire. It might take you 12 months to rebuild and refurbish the premises before you can reopen. Your BI policy pays you whatever revenue you would have earned during that time (minus revenue you actually did earn during this period, of course).
Let’s look at some real-world examples to get a sense of how BI works in practice. A BI policy will pay:
Salary – If a florist, for example, typically pays himself a salary from his business earnings to cover his personal expenses (home mortgage, cost of living items, etc.), BI will pay that salary.
Interest Expenses – Suppose a store owner took out a loan to purchase expensive equipment for the business. That note still exists, even after the property loss. Facing the absence of revenue, the business owner must nonetheless continue paying interest on that loan. BI enables her to keep paying the interest expense until business revenue returns.
Fixed Overhead Expenses – Most businesses have an array of fixed overhead expenses – the contracts for trash removal or pest control services, for example, or the building lease. And sometimes you aren’t able (or don’t want) to get out of a contract after a loss. BI allows you to continue to pay your fixed overhead expenses. That way you don’t lose the great rate you negotiated on a contract.
As these examples show, BI is a hugely significant form of assistance. BI allows you to pay your mortgage or rent, and to continue drawing your standard paycheck from the business. BI lets you maintain a presence in your industry while your business is in the process of recovering from a disaster. Think about it: 12 months is a long time, and you want to reopen after that recovery period as if nothing happened. BI helps you keep your industry profile while you deal with the disaster.
Calculating BI coverage is complex, and can vary depending on your policy. The period of time for which BI covers lost revenue, for example, can change from policy to policy. What’s more, determining both the projected revenue of your business and the lost revenue – the basis for BI pay-outs – requires expert accounting. There’s also the question of duration – how long your policy covers the business, and the period of time for which the business is affected for coverage purposes. And this is before we get into variable and fixed costs, payroll coverage for employees, and other complicated matters relating to BI that come into play during settlement discussions with your insurance carrier.
We will follow this post with a separate piece examining these carrier-related BI complexities and other elements of BI. Of course, the real takeaway is that you really should get a public adjuster to optimize your BI claims. Almost every element of utilizing BI coverage requires expertise and back-and-forth with the insurance company’s claims team, which is using its own expertise to minimize coverage payout.
What you really need to know about BI coverage is that you should have it, because it will pay (most of) your costs during the time when your business is recovering from a covered event. Once you need to use your BI coverage – hand it over to a public adjuster!