BUSINESS INTERRUPTION (Loss of Income) COVERAGE

What Happens if Your Business is Shut Down?

Your business could be interrupted and shut down due to natural catastrophe (flood) or accident (fire). No matter, if you are unable to bring in an income, what happens to your livelihood?

Depending on the type of policy you choose and the type of perils the policy covers, if you are unable to conduct business, insurance can pay the income you lose as the result of a loss (catastrophic or accidental).

Although insurance provides money for repairing or rebuilding property damaged as a direct result of fire, most policies do not cover indirect losses, such as income that is lost while the business is interrupted for repairs.

What is Business Interruption Insurance?

Business interruption insurance covers indirect losses that occur when a direct loss forces a temporary interruption of business due to a natural catastrophe such as a flood or an accident such as a fire. It also reimburses policyholders for the difference between normal income and the income earned during the enforced shutdown period. Not only is income reduced or cut off completely during such interruptions, but many business expenses continue, such as taxes, loan payments, salaries to key employees, interest, depreciation and utilities. Without income to pay these expenses, the business is forced to dip into reserves.

Interruptions in business also often trigger extra expenses. For example, overtime may be authorized to speed the business toward full operation again, or it may reopen with a skeleton staff (additional payroll) in temporary quarters (additional rent) using leased furniture and equipment (additional overhead). These expenses put an added strain on finances at a time when little if any income is being produced.

A firm can also buy business interruption insurance to protect against interruptions triggered by direct loss on someone else's property. For example, if a key supplier is shut down by a fire and can't deliver critical raw materials to a manufacturer, the manufacturer's business may be seriously interrupted. Property damage at a key customer's business may have the same effect. If you depend on one firm for most of your volume and that firm is forced to suspend purchasing, you will lose income.

Every year hundreds of businesses that carry adequate insurance against direct property losses fail because they are not insured for indirect losses. Don't forget to protect your business against loss of income and unusual expenses that may result if indirect loss forces you to close temporarily.

» to top