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What is business interruption insurance?
Congratulations. You’ve started or own your own business. With that comes a lot of freedom and flexibility, but also responsibilities. Since it’s likely your only source of income, you’ll need to protect it from risk(s).
Business interruption insurance (or business income insurance) helps cover losses you may suffer after your business experiences some form of disaster that may force you to close. Unlike property insurance (which covers physical losses), business interruption insurance also covers income or expenses you would have incurred had it not been for the temporary closure.
Who needs business interruption insurance?
Anyone that owns a business with expenses, payrolls etc. No matter the size of the operation, business interruption insurance is a must-have. Even non-profit organizations have expenses and rent to pay, and should consider this type of insurance for their organization.
What is covered or not covered by business interruption insurance?
While business interruption insurance can cover you for many expenses while your business is temporarily shuttered, it does not cover all risks. Different policies will account for various risks, but here is an example of what may or may not be covered:
| Coverage type | Included? (YES/NO) |
|---|---|
| Utilities: Coverage for your utilities bill should you require it. | YES |
| Mortgage and rent: If you're paying rent or mortgage for your business location(especially if forced to temporarily relocate), those costs would get covered. | YES |
| Tax or loans: This would cover any business-related taxes or loans, if incurred while the business is shut down. | YES |
| Payroll: Coverage for your payroll expenses, including employee wages. | YES |
| Lost revenue: Coverage for the revenue you would've earned if your business remained operational. | YES |
| Earthquakes, floods and other disasters: This would fall under your commercial property coverage, not business interruption. | NO |
| Terrorism: If your business is interrupted by an act of terror, you will not be covered. | NO |
| Pandemics: If your business is forced to close down due to a pandemic, disease or virus (e.g., COVID-19), then you will not be covered by insurance. | NO |
| Undocumented income: Any income that you fail to disclose or document will not be covered. | NO |
Common business interruption insurance claims
Business interruption insurance is intended to cover fixed costs that are unavoidable by the business owner, as well as any loss in profit resulting from a shutdown in the business.
Your insurance provider will quantify your losses and expenses by considering the length of the interruption, the amount of profit lost and how much your business would have earned had there been no interruption. Your claim is then reviewed, similar to other insurance claims.
It’s important to notify your insurance provider quickly and document the damage, along with evidence, of your losses.
Here are examples of the types of losses business interruption insurance can mitigate:
Destructive fires
Let’s say you own a restaurant, and a fire breaks out in your kitchen. You’re unable to contain it on time, and as a result, the kitchen is destroyed along with all the equipment therein. Without a kitchen, your restaurant is unable to operate and has to shut down for repairs – meaning no income until you’re back in business. Your total losses end up being $60,000, which includes income and operational costs.
Break-ins
Someone breaks into your office space and vandalizes it. This results in you having to operate from another location, leading to additional rent costs of $25,000. With this coverage, those costs would be taken care of by your insurer. Otherwise, they would have to come out of your pocket.
Supply shortage
Let's assume your supplier is unable to deliver their shipment due to a flood. This leads to a delay and ends up costing you $86,000 in revenue, while the supplier deals with the issue. You could try to find another supplier, sure, but that would still lead to lost revenue.
How much does business interruption insurance cost?
The cost of business interruption insurance varies widely. It can cost anywhere from hundreds to thousands of dollars per year. Each business is different and many insurance companies base their rates on your revenue. Consult your business interruption insurance provider to understand your needs and associated costs.
How to get the cheapest business interruption insurance quote
Here are some ways to reduce your business interruption insurance costs:
Shop around
Comparing insurance rates from different companies is the smartest way to get the most affordable price.
Bundle up
Many insurers offer discounts when you buy several insurance policies instead of one. Ask about bundle deals.
Increase deductibles
Opt for higher deductibles to lower your premium costs.
Choose a short compensation period
If you can do this, your insurance provider will pay you until the damage is repaired or replaced.
Assess your needs
Tailor your insurance policy so that the amount you pay is proportional to your business needs.
Maintain a good claims history
A clean claims history can often lead to lower premiums.
Work with an insurance broker
Brokers can help you find access to special rates and deals.
Provide accurate information
Undocumented income and other false statements could lead to a loss of insurance. Be honest and be accurate.
Stay claims-free
Maintaining a claims-free record can often lead to lower premiums over time.
Implement safety measures
Insurers may offer lower rates if you have certain safety measures in place, like surveillance systems.
Ask for discounts
Ask about any available discounts, like having a claim-free history.
Consider a risk management plan
A risk management plan can demonstrate to insurers that you are proactive about minimizing risks.
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Your business interruption insurance questions, answered.
Is business interruption insurance mandatory in Canada?
There are no laws in Canada that require businesses to take out business interruption insurance. However, some customers and potential partners may require certain insurance be in place before doing business with you. Each business is different and so it’s important to assess your individual insurance needs.
Can I buy business interruption insurance only on selected risk?
This will depend on your provider and the nature of your business, since each business has its own unique risks. For instance, if you're a contractor who works alone, then you may not need payroll coverage. Likewise, if you don't pay mortgage or rent, then you won't need coverage for that.
Most policies cover lost income and ongoing expenses if you are forced to close temporarily.
Extra expense coverage can be obtained to cover things like temporary office space, equipment, paying overtime or covering the cost of temporary transportation, for example. There is also something called Contingent Business Interruption coverage if a supplier’s business, on which you rely, has their business disrupted.
Joel Kranc
About the Author
Joel Kranc is an award-winning writer, author and journalist. Most of his experience lies within the institutional investment and financial services space. He also covers a variety of business topics for publications in North America and the UK.