What Is Business Interruption Insurance? How It Works & Coverage

This article is part of a larger series on General Liability Insurance.

Business interruption coverage, sometimes referred to as loss of business income insurance, is small business insurance that provides your business with monetary compensation when—because of a covered loss—your business cannot operate. The coverage is normally part of a business owner’s policy (BOP) and is very rarely available as a standalone policy.

No matter how hard you work to keep your business open, there are things out of your control. A windstorm can blow a tree down onto a power line, knocking out power and forcing your business to close. When that happens, having business interruption insurance can help you with the costs associated with the downtime and keep money coming into your business.

Key Takeaways

• Loss of business income insurance is important for small businesses because it helps with financial losses that come from a covered loss.
• It is a first-party coverage related to losses involving your property.
• There are endorsements you can purchase that will expand and enhance the amount of coverage or how it applies to your business.

How Business Interruption Insurance Works

When you have a covered loss, like a tree on the roof or a fire, your commercial property insurance policy takes care of the damage but doesn’t provide any financial assistance for the downtime your business will face. That’s where business interruption insurance comes into play. It can help pay for the loss of income while the damage is repaired and the business reopens.

The payments made are to help cover business expenses. Usually, the type of business that qualifies for business interruption coverage has 100 or fewer employees and a yearly revenue cap of $5 million.

Most policies come with a time period, usually between 48 and 72 hours, that must pass before the coverage kicks in. You can think of this as a time deductible (insurance deductible). Also, please keep in mind that the specifics of how this coverage works will depend on the policy’s language.

What Business Interruption Insurance Covers

While the coverage helps compensate for lost revenue, it isn’t designed to make your business money. Instead, it helps cover ongoing expenses like the following:

• Payroll
• Rental property payment
• Mortgage or loan payments
• Extra expenses

These are some of the key types of financial losses it can help with. If your business is set up in a temporary location, business interruption coverage can also be beneficial for relocation costs.

There are several ways to enhance this coverage. Key options include the following:

• Civil authority coverage would usually kick in after a natural disaster when a business may be forced to close due to an order by the government (local, state, or federal). For example, a hurricane is coming, and the government orders an evacuation.
• Contingent business interruption expands coverage to include disruptions to the supply chain. For instance, your provider of sable fur for your hat store goes out of business. And while you could try to use nutria and see if anyone notices, history says that won’t work. So, you file a claim for loss of business income.
• Extended restoration period is the time period that business interruption coverage will pay out. You can opt to extend it for up to a year. Many policies will continue to pay until the end of the period, even if you cancel or do not renew the policy during the restoration period.

What Business Interruption Insurance Doesn’t Cover

As is the case with all types of insurance policies, not every type of loss is covered.

• Liability or workers’ injuries. For liability, you would need general liability insurance or workers’ compensation insurance to protect your employees.
• If an item breaks.
• Communicable diseases. Commercial policies have a blanket communicable disease exclusion. This exclusion created many problems for small businesses during the COVID-19 pandemic. It has also put some pressure on the government to implement a law similar to the Terrorism Risk Insurance Act that was instituted following 9/11. But at this time, nothing has formally happened, so communicable diseases remain uncovered by business interruption insurance.
• Undocumented income. Having handled business interruption claims in the past, I’m surprised that the biggest impediment to a timely resolution is the policyholder producing documentation for the lost income.

Business Interruption Insurance Cost

While business interruption coverage may be available as a standalone policy, I’ve never seen that offering. Nearly every insurance provider offers business interruption insurance as part of its BOP.

A business owner’s policy is a policy for small businesses that combines three key areas of coverage: general liability, commercial property, and business interruption insurance.

BOP costs fluctuate based on the industry, the size of the business, and the type of property. That said, there are some average costs for BOPs to give you an idea of what you may pay:

While property values fluctuate based on the actual property, each of the above quotes was for businesses with three or fewer employees and $200,000 in annual income. The general liability coverage each carried $2 million aggregate and $1 million occurrence limits.

As is standard when compiling a quote, the rate you receive may be much different from the estimates provided in this article. That is because insurance providers will take the following into account: your claims history, business experience, business size, industry, annual revenue, coverages requested, and geographic location of your business. Insurers also draw on proprietary data from their own experience underwriting business insurance to determine the final premium.

How to Buy Loss of Business Income Insurance

When it comes to purchasing business interruption insurance or any other type of small business insurance, you’ve got multiple options. However, this may feel overwhelming. To simplify things, think of it this way: you can work with an agent or broker or directly with a carrier.

• Agent or broker: Because of the many factors that go into how an insurance company calculates premiums, comparing quotes is a good practice when shopping for business interruption coverage. This can be done either through a local agent or broker or online through a digital broker.
• Carrier or provider: The upside is that many times, working directly with a carrier can result in a potential discount, as there is no intermediary collecting a fee. The downside is that you won’t know what your options are if the provider only quotes you a price for its product.

I’ve done extensive research on current small business insurance companies. Using my own rubric, based on my years of experience in the industry, I’ve evaluated and determined the best small business insurance companies. All of these offer a BOP with business interruption coverage.

Bottom Line

No matter how carefully you plan for every scenario, as a small business owner, you understand how to “expect the unexpected.” Business interruption insurance is a great policy to have for those unexpected moments when no money is coming into the business but bills still need to be paid.

Business interruption coverage is a special type of small business insurance available through a BOP that helps a business handle financial losses and expenses that come about due to a claim. Importantly, it lets your business continue to operate and be ready for success when it’s time to reopen for business.

About the Author

Nathan Weller

Nathan Weller is a subject matter expert at Fit Small Business focusing on commercial insurance. He has 15 years of experience in insurance: operations, FNOL, and claims handling. He also helped build a claims department at an insurance start-up. In between his time working at different insurance carriers, he spent 8 years running a small, non-profit organization. Nathan understands the small business daily operations as well as the complexities of insurance.