Business Interruption Insurance – What You Need to Know
It can be a little overwhelming trying to figure out what kind of insurance your business needs. You may already have Property Insurance and assume that’s enough to protect you from any structural harm, such as fires or floods, that may befall your business. However, unforeseen incidents often require you to temporarily close your business for repairs. The losses associated with temporary closures not related to direct physical damage to your property or the property of others typically are not covered by standard Property Insurance plans.
Many businesses that are forced to close temporarily in the wake of a disaster never fully recover. Bills continue to pile up while revenue and profits are on pause. Between payroll, rent, and repair costs, it’s enough to bring a business to its knees.
The best way to ensure you don’t financially suffer from a temporary closure is to have Business Interruption Insurance or Business Income Coverage. You may be wondering, how does this type of insurance work? What exactly does it cover?
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What is Business Interruption Insurance?
Business Interruption Insurance covers loss of income resulting from a disaster scenario like a fire, flood, windstorm etc. This includes income lost due to the temporary closing of a business facility in order to rebuild after a disaster. This considers and covers the profits that would have been earned had the business been able to remain open. By contrast, just Property Insurance covers only the physical damage done to the business.
This policy is designed to keep businesses in the same financial shape they would have been in had the disaster not occurred. The extra coverage can be added to your Property Insurance plan to make it more comprehensive. Here are some important terms to understand when it comes to Business Interruption Insurance:
- Actual Loss Sustained: This refers to the big picture of what a company loses in the wake of a disaster. It encompasses not just physical damage, but the income lost when a company is inoperable for a period of time. Actual loss sustained business interruption insurance typically covers this actual loss effectively on a unlimited basis while Property insurance alone does not.
- Business Income: This includes the net income that a business would have earned had the disaster not occurred and the business had been able to remain operable. Business income is also used by some insurers to describe their business interruption coverage.
- Period of Restoration: The length of time needed to rebuild or repair damaged property. This period begins when the damage occurs and lasts for an agreed-upon time period, as defined by the policy (usually 12 or 24 months), in which the property should reasonably be able to be repaired. Insurers are liable for the loss of business income during this time.
What Does Business Interruption Insurance Cover?
Business interruption insurance is an add-on to your property insurance policy or business owner’s insurance policy.
Business interruption insurance provides coverage and compensation for loss of income, repair and replacement costs, employee wages, and more that may arise when an event that is out of your control forces your business to shut down temporarily.
Here are some examples:
- Loss of profit because your business cannot operate.
- Employee wages during the period of closure when you cannot pay them.
- Expenses for loan payments and rent or mortgage payments.
- Construction costs for rebuilding your damaged business structures.
- Temporary relocation costs as you rebuild your permanent office.
- Rental equipment costs to operate as your business is interrupted.
- Any taxes your business is subjected to so you can pay on time and avoid penalties.
- Training and employee on-boarding costs associated with new equipment or replacement parts for existing equipment.
Who is Eligible for Business Interruption Insurance?
Unexpected losses can interrupt your business regardless of which industry you are in. Any business in Canada, whether big, small, public, or private, should think about purchasing business interruption insurance.
As long as you have a business owner’s liability insurance policy or property insurance policy, you can add business interruption insurance to your coverage.
How Much Business Interruption Coverage Do I Need?
The amount of business interruption coverage you need depends on a variety of factors. The most important factor to consider is the length of time it will take to rebuild your business and restore lost revenue after an interruption.
For example, it might take you six months to a year to restore your operations to regular capacity after a flood causes water damage to your office buildings and equipment. Your business interruption insurance should provide coverage for any lost revenue, employee costs, temporary expenses, and more during those six to 12 months.
Here are other factors to consider when determining how much business interruption coverage you need:
- The type of industry you are in and the damage risks your business may be exposed to.
- The size of your company and the number of employees you have.
- The location of your business.
- The types of repairs, replacements, and losses your business will face in the event of a business interruption.
- The amount and types of assets your business has.
- The financial situation of your business.
- The type of coverage option you want for your business, such as all risk, limited, extended, etc.
Once you have determined your business interruption risks and how each factor can impact your business in the event of an interruption, you can start researching business interruption insurance rates and find one that is suitable for your business.
Is Business Interruption Insurance Worth it?
As with any type of insurance, you’ll regret not having it in the event of a disaster situation. It ensures you don’t suffer severe losses should you have to temporarily close your business. Most business interruption insurance plans of this kind cover some or all of the following:
- Profits: Any profits you would have earned during the closure period had you been able to remain open and operating as usual.
- Rent or Lease payments: Even if your business premises are unusable following a disaster, you may still be expected to make rent payments. Business Interruption Insurance covers this so you don’t fall behind on payments.
- Employee Wages: If your business closes and revenue is no longer being generated, you probably won’t be able to continue paying employees. This results in losing employees as they are forced to find other jobs. With Business Interruption Insurance, you can continue making payroll during the closure period. Your employees will thank you.
- Taxes: Unfortunately, businesses are still expected to pay taxes after a disaster. Coverage will help you pay on time and avoid penalties.
- Training Costs: In the aftermath of a disaster, you may need to replace equipment and retrain employees on using the replacements. This policy can cover these training costs.
- Moving: Should you need to temporarily move locations in order to keep your business up and running while repairs occur, Business interruption Insurance can cover moving and rental costs.
- Loan Payments: If you have an outstanding loan, you’ll still be expected to make payments, even if your business is partially or completely closed. Coverage of this kind will allow you to stay current on payments.
- Government-Mandated Closures: In the event that government actions cause business operations to temporarily cease, Business Interruption Insurance protects you from the resulting losses.
How Much Does it Cost?
The cost of coverage depends on how great the risk of disaster is for the premises and how much coverage you buy. Factors such as location, nature of the business, and the business’s ability to function at an alternate temporary location all affect the cost. Business interruption Insurance must be added to an existing Property Insurance policy.
Your policy should cover a period of time sufficient for rebuilding and re-establishing pre-disaster levels of revenue. If you would like more information on costs, contact one of our ALIGNED insurance brokers. We will be happy to discuss what policy limits would make the most sense for your business.
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ALIGNED Business Interruption Insurance Plans
When it comes to finding the plan that best suits your operating requirements, ALIGNED Insurance has your back. We’re proud to say that our industry peers regard us as one of the best insurance teams in Canada. We have an ever-expanding portfolio of clients from all industries. We are proud to serve both large and small organizations.
Our mission is to get you set up with insurance that’s ALIGNED with your budget and bottom line. We’ll work with you to:
- Determine what insurance you need
- Walk you through the process, step-by-step
- Assist in collecting all necessary paperwork
- Answer any questions you may have about Property and Business Interruption Insurance
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Contact us today!
Business Interruption Insurance is an important precaution to take. In the event of a disaster, it prevents you from suffering potentially catastrophic losses while you rebuild.
At ALIGNED Insurance, we offer personalized insurance for all our clients. Your peace of mind is our priority. Our team will work to address your specific needs and deliver a policy that gives you the protection you need at a price that works for your budget. Call ALIGNED Insurance today!
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