Business interruption insurance (also known as business income insurance) is a type of
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
that covers the loss of income that a business suffers after a
disaster
A disaster is a serious problem occurring over a short or long period of time that causes widespread human, material, economic or environmental loss which exceeds the ability of the affected community or society to cope using its own resources ...
. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster.
It differs from
property insurance
Property insurance provides protection against most risks to property, such as fire, theft and some weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, or bo ...
in that a property insurance policy only covers the physical damage to the business, while the additional coverage allotted by the business interruption policy covers the profits that would have been earned. This extra policy provision is applicable to all types of businesses, as it is designed to put a business in the same financial position it would have been in if no loss had occurred.
This type of coverage can be added onto the business's property insurance policy or comprehensive package policy such as a
business owner's policy A business owner's policy (also businessowner's policy, business owners policy or BOP) is a special type of commercial insurance designed for small and medium-sized businesses. By bundling general liability insurance and property insurance into a s ...
(BOP) or as part of a standalone policy in some jurisdictions. Since business interruption is included as part of the business's primary policy, it only pays out if the cause of the loss is covered by the overarching policy or a defined event in the case of a standalone.
Coverage
The following are typically covered under a business interruption insurance policy:
* Profits. Profits that would have been earned (based on prior months'
financial statement
Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity.
Relevant financial information is presented in a structured manner and in a form which is easy to un ...
s).
* Fixed costs.
Operating expense
An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure (capex), is the cost of developing or provid ...
s and other costs still being incurred by the property (based on historical costs).
* Temporary location. Some policies cover the extra expenses for moving to, and operating from, a temporary location.
* Commission and training cost. Business Interruption (BI) policy essentially covers the cost of providing training to the operators of the machinery replaced by the insurer following the insured events.
* Extra expenses. Reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operation while the property is being repaired.
*
Civil authority
Civil authority or civil government is the practical implementation of a state on behalf of its citizens, other than through military units (martial law), that enforces law and order and that is distinguished from religious authority (for example ...
ingress / egress. Government-mandated closure of business premises that directly causes loss of revenue. Examples include forced business closures because of government-issued
curfew
A curfew is a government order specifying a time during which certain regulations apply. Typically, curfews order all people affected by them to ''not'' be in public places or on roads within a certain time frame, typically in the evening and ...
s or street closures related to a covered event.
This coverage extends until the end of the business interruption period determined by the insurance policy. Most insurance policies define this period as starting on the date of the covered peril and the damaged property is physically repaired and returned to operations under the same condition that existed prior to the disaster.
In addition, businesses can purchase contingent business interruption coverage, which pays out when a business is unable to operate because of an event (such as a
natural disaster
A natural disaster is "the negative impact following an actual occurrence of natural hazard in the event that it significantly harms a community". A natural disaster can cause loss of life or damage property, and typically leaves some econ ...
) that damages the business premises of one of its suppliers or customers, thus preventing it from engaging in normal trade.
References
External links
Airmic Property Damage and Business Interruption Benchmarking Report 2012P&C Insurance: The Conundrum of Business Interruption Coverage during the Coronavirus Pandemic
{{DEFAULTSORT:Business Interruption Insurance
Types of insurance
Business continuity