The dynamics of running a small business can be…unpredictable. One day you achieve five times your usual revenue at your diner, the next day an unexpected event occurs and puts you out of business for a month. In addition to natural disasters, other unforeseen events can bring your business to a halt. For instance, let’s say a storm knocks a tree into the front window of your business. Although your commercial property insurance will cover the material damage to replace the window, you will still have to incur fixed expenses relating to your business. Business interruption insurance, also known as business income insurance, would cover costs of lost income to your business until the window gets repaired. To protect your small business against such risks, you need to buy a business interruption insurance policy.
Now, let us answer a few commonly asked questions that will help us understand the business interruption insurance policy better.
1. What Is Business Interruption Insurance and Why Do You Need It?
Business interruption insurance is an insurance policy that covers your business when it becomes inoperable following the occurrence of an insured peril. Usually, the policy will cover, among other things, lost revenue, increased cost of working and standing charges.
In essence, business interruption insurance is here to ensure that your business moves on, no matter what. If your business burns down and you have to relocate to another location temporarily to allow for repairs, this policy will cover the costs you incur in the process. It will also pay for the fixed expenses that you usually incur, like payroll and rent.
2. How to Get the Right Amount of Coverage for Your Company
Determining an appropriate amount of business interruption insurance coverage for your business depends on many factors. Let’s briefly discuss three ways you can determine the right amount of coverage for your business.
The Time It Would Take to Recover From Physical Loss or Damage
Based on this, you can calculate the amount of money you will need to pay for your fixed expenses. Would the limit you choose be sufficient to get you through the period? If it takes a long time to repair your business premises, then it is advisable to get a higher amount of coverage.
Gross Revenue and Expected Profits
Your usual gross earnings provide a rough guideline that you can use when selecting your policy limit. Your limit should be at least as much as your gross earnings for a specified number of months. You can also factor in your expected profits to get a clearer estimate of the limit you need.
Availability of Alternative Locations
In case a covered peril occurs, you may be forced to relocate your business elsewhere. Look around, are there any ready options that you can use for your business? If not, you may have to choose a higher limit to accommodate the costs of finding alternative locations.
3. Why Should Small Businesses Have Business Interruption Insurance?
Small business owners stand to gain a lot from a business interruption insurance policy. The most profound reason is to ensure the business continues even in the face of adversity. The ability to recover from setbacks – be they natural weather calamities or otherwise – is a key determinant of the success of a small business.
In addition, business interruption insurance coverage gives the business owner peace of mind. They can rest easy knowing that in case of loss or damage that renders the business inoperable, they will still recover lost profits.
4. The Difference Between Property Damage Only Policy and Loss of Profits Policy
Property damage only policy covers material damage from an insured peril, while a loss of profits policy compensates you for lost income, fixed expenses, and increased cost of working. Therefore, while a business insurance policy only covers actual damage to property, the business interruption insurance policy covers foregone revenue. In both cases, however, the cause of the loss or damage has to be a covered peril.
5. Important Features, Exclusions, and Limitations for Business Interruption Insurance
It is important to note that the business interruption insurance policy does not cover material damage. This means that you cannot claim loss or damage to property under this policy. Material damage is covered by your commercial property insurance. Many companies may bundle these two policies with a business liability insurance policy and sell it as a package.
Every insurance contract has exclusions, and it is important to go through the fine print to ensure that you understand them. Many business interruption insurance policies will exclude communicable diseases, like the COVID-19 pandemic. Also, any undocumented income will be excluded and you are therefore encouraged to keep your books in order, always.
6. Tips on How You Can Save Money on Premiums
For starters, bundle up your business interruption insurance policy with other policies to get better premiums. You can combine it with your business liability insurance policy, commercial property insurance, workers’ injury for your employees, and even commercial auto insurance if your business has commercial vehicles. This will get you an overall lower premium as opposed to getting different policies from different insurers.
Another tip is to avoid claims by managing your business risks adequately. You can achieve this by fitting fire alarms and extinguishers, doing regular risk surveys, and training employees to develop a culture of safety in them. You can also protect your business from adverse weather to minimize damage caused by Mother Nature. In the long run, no claims on your insurance policies will go a long way in reducing your premiums.
Learn More About Business Interruption Insurance
Business interruption insurance is one of the best risk management techniques that you can apply to your small business. It is also important to choose the right cover for your business, one that responds to your specific insurance needs.