When unexpected events halt your business operations, business interruption insurance provides financial support to help you recover lost income and manage ongoing expenses. This type of insurance, often called loss of income insurance, protects companies from the devastating financial impacts of temporary closures due to fires or major equipment failures.
What Is Business Interruption Insurance?
Updated: November 28, 2024
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What Does Business Interruption Insurance Cover?
Business interruption insurance (or BI insurance) primarily covers income loss, ongoing expenses and specific expenses necessary to resume normal operations. Some of its key inclusions are:
Loss of business income
Business interruption insurance compensates for revenue lost when your business can't operate due to a covered event. It calculates the projected income based on previous revenue trends to ensure fair compensation.
Operating expenses
It covers necessary operating expenses like rent, payroll, utilities and loan payments, which continue despite the business closure. It also helps maintain essential services like electricity and water.
Temporary relocation costs
If your business needs to operate from a temporary location due to property damage, BI insurance can cover expenses for renting a temporary facility, transporting equipment and setting up essential infrastructure.
Employee wages
Employees continue to receive pay, even if the business isn't fully operational. However, business loss insurance covers only regular payrolls, not extra or overtime wages.
Professional fees for claims assistance
BI insurance may include the costs of hiring professional services, such as accountants, to handle claims processing.
What Business Interruption Insurance Does Not Cover
Business interruption insurance coverage excludes certain types of losses and expenses, such as:
Partial shutdowns
Business interruption coverage generally requires a complete shutdown due to the event, not just a partial suspension of operations. If your business faces reduced hours but remains open, coverage may not apply.
Pandemic-related losses
Many business interruption insurance policies explicitly exclude losses from pandemics or widespread health crises. While some businesses sought claims during COVID-19, insurers typically declined these claims due to policy exclusions. Separate pandemic-specific coverage may be available but isn't part of standard business interruption insurance.
Flood or earthquake damage
BI coverage excludes damage caused by natural disasters like floods and earthquakes, as these typically require separate policies. Businesses in disaster-prone areas should consider additional flood or earthquake insurance.
Types of Business Interruption Insurance Coverage
Several types of business interruption insurance coverage address specific business needs.
- Standard business coverage: This most common business interruption policy covers income loss during temporary closures caused by specific covered events. It typically requires physical damage to activate coverage and lasts for a set period, known as the indemnity period, based on the expected recovery time.
- Extended business coverage: This business continuity insurance continues coverage after reopening, compensating for lost income during a slower recovery. It helps businesses regain normal revenue levels and may cover promotional expenses to rebuild activity and customer bases.
- Contingent business interruption insurance: This coverage applies when third-party suppliers or vendors face disruptions that affect your business. It benefits industries like manufacturing or retail that rely on external supply chains. The disruption must involve covered events, such as property damage.
- Extra expense coverage: It covers costs beyond regular BI insurance, specifically additional costs to resume operations quickly, such as renting alternate spaces, hiring extra staff or paying for expedited shipping.
- Civil authority coverage: It activates when a government or civil authority orders closures or restricts access due to safety concerns, such as natural disasters or public health emergencies.
Are Business Income and Business Interruption Insurance the Same?
Business income insurance and business interruption insurance aren't the same. Business income insurance typically targets the income replacement needed to cover expenses during temporary suspensions, focusing on lost revenue. Business interruption insurance has a more comprehensive scope, covering income and additional fees to facilitate business continuity.
The differences become more apparent when considering additional expenses covered under business interruption policies, such as relocating operations or hiring extra staff. Business income insurance often excludes these supplementary expenses, maintaining a narrower focus. Companies might combine both to achieve thorough financial protection during unexpected closures.
In addition to business interruption insurance, companies often benefit from other types of insurance, such as general liability and commercial property insurance, which can further protect against risks and support business continuity.
How Much Does Business Interruption Insurance Cost?
Business interruption insurance costs depend on various factors, including location, industry type and coverage level. For instance, businesses in natural disaster-prone regions may have higher premiums due to the increased likelihood of claims. Industries with higher operational risks, like manufacturing or retail, may also face higher costs. Business size, revenue and historical claims are additional factors.
How to Get Business Interruption Coverage
Here are critical steps to securing business interruption coverage:
- 1
Assess coverage needs
Evaluate your business’s risks, such as location-specific threats or industry vulnerabilities. This will help determine the level and type of insurance for business interruption that best fits your operation.
- 2
Compare providers
Research top insurance providers to compare business interruption insurance options and find a policy that meets your needs. Different insurers may offer unique terms, conditions and pricing based on the scope of coverage.
- 3
Review policy terms
Examine each business interruption policy to understand covered events, exclusions and indemnity period limits.
- 4
Calculate desired coverage level
Determine the amount based on your business’s average monthly income and essential expenses. Consulting with an accountant or advisor may help with accurate calculations.
- 5
Consider add-ons
Explore additional policy extensions, such as contingent business interruption insurance or extra expense coverage, to tailor the policy to your needs.
- 6
Consult with an agent or broker
Work with an insurance professional who can provide detailed insights into business interruption insurance coverage. Agents help match coverage with business specifics, avoiding gaps and ensuring a comprehensive policy.
- 7
Finalize and monitor policy
Once chosen, finalize your BI insurance policy and regularly review it to ensure it aligns with your changing business needs.
FAQ: Business Interruption Insurance
What is business interruption insurance?
Business interruption insurance provides financial support for lost income and ongoing expenses during temporary closures caused by covered events.
What does business interruption insurance cover?
Business interruption insurance coverage includes income loss, fixed expenses, relocation costs, employee wages and professional fees for claims processing.
Does business interruption insurance cover payroll?
Yes, business interruption insurance often covers payroll.
How much does business interruption insurance cost?
Business interruption insurance costs vary based on factors like industry, location and coverage level, with high-risk areas or businesses generally facing higher premiums.
About Mark Fitzpatrick
Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.