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Small Business

Business Interruption Insurance Explained

min read

When you go into business for yourself, you take a lot of things into account. You think about how much money you’ll charge, how you’ll attract customers, the equipment you’ll need to buy, and a million and one other things. Being a business owner, in other words, isn’t easy, but it certainly can be rewarding.

While you certainly hope for the best, you also need to plan for what happens when things don’t quite go according to plan. This is why you need business insurance. But business insurance is actually a fairly broad term. What you really need are different types of coverage, like liability insurance or a business interruption policy, to cover different aspects of your operations. Not every business needs the exact same types of policies. Nor does every business need the same level of coverage. But as a small business owner, it’s important to know the different types of insurance out there. This way you can make an educated choice in terms of the types of protection your business needs.

And why do you need insurance coverage you might ask? Simple. Small business insurance financially protects you, your employees, your customers and third-parties in case of accidents or mishaps that can happen along the way. This means you won’t be bankrupted if you’re sued. And if a mistake happens, you’ll be able to recover.

Plus,  insurance policies like general liability insurance are an absolute requirement for working in certain fields like construction and fitness. That means you need it to even be considered for a job. Similarly, liability insurance positions you as a professional. It shows that you’re a serious person who looks after details, and can be trusted to get the job done. Other types of insurance, however, are up to your own discretion.

What Is Business Interruption Insurance?

One type of insurance you may consider is what’s called business interruption insurance. What business interruption insurance covers is the loss of income your business may experience in the event of a disaster. As such, you may also hear it referred to as business income insurance.

Business Interruption Insurance Coverage

There are a few basic areas that most types of business interruption insurance will cover in the event of disaster. These include things like:

  • Earned profits – The insurance company will look at your past financial statements to assess what you would have earned during that period, and will cover you accordingly.
  • Temporary location – As you rebuild your business, you will need somewhere work. As such, some policies will cover rent on a temporary location, and even the additional expenses related to moving and operating there.
  • Fixed costs – Even if your office was destroyed in a fire, you may still have to pay property taxes. Same goes for things like electricity. These operating expenses, and others, may be covered, based on your prior costs.
  • Extra costs – Another business interruption claim you can make is that of extra expenses incurred while waiting for your property to be repaired. Obviously not everything is covered here. The key is on reasonable. For example, additional office supplies or even a new coffee machine if that’s something your business really needs to do business as usual.
  • Training costs – You will require training and downtime if you have to use new or different equipment when yours is destroyed. While you can activate a separate policy to cover the new machinery costs, your training expenses can be covered by your business interruption insurance.

Activating Your Business Interruption Policy

As for how long you have to make your claim, again depends on your policy. Usually the policy provider will send someone over to assess the damage to the property. That person will do a business interruption insurance calculation. You will then receive payment to cover all of these expenses according to a set timeframe. The latter will usually include a start and end date, when the business is expected to be back up and running under the same condition that it was before disaster struck.

What Is the Difference between Business Interruption and Property Insurance?

Business interruption and property insurance are indeed quite similar at first glance. The main difference is that property insurance covers the actual physical damage to your business from unforeseen circumstances. This may include repairs or replacement costs of the physical structure itself, as well as some or all of its contents. Business interruption insurance, on the other hand, does not cover costs of rebuilding or recouping physical property. Instead it covers profits you would have earned during the time the business is unable to operate due to damages to your property.

As for business interruption insurance cost that’s a bit tricky. The price will be determined based on your small business risk assessment and the potential costs to the insurer should your policy be activated. Also it’s hard to single out the cost. That’s because in general, you cannot purchase business interruption insurance on its own, as a standalone policy. Instead you will usually purchase it bundled with other types of insurance, the most common of which is property insurance. But you can also find it included as part of a general business owner’s policy (BOP).

Who Needs this Coverage, When, and Why?

Most businesses operating out of a physical space could use business interruption insurance. For example, if you have a hair salon, yoga studio, or consulting office, just think what would happen to your income should you lose your literal place of work. This type of insurance is your safety net, ensuring you keep your income steady in the unfortunate event of disaster. More so, it could be the difference between continuing to thrive over the long-haul, and simply having to fold. In other words, if you’re in a business that requires property insurance, it’s usually well worthwhile to bundle business interruption insurance in as well.

Other Types of Insurance Business Owners Need

 As we mentioned, when it comes to business insurance there are quite a few different types of policies you should consider. These include the obvious ones like liability insurance. Plus, workers’ comp if you have employees, and commercial auto insurance if you’re driving on the job. Then there’s homeowner’s insurance if you work out of your home or renter’s insurance if you rent your premises. Others such as health insurance, professional liability insurance, and even life insurance are also well worth considering.

Bottom line the right insurance coverage is essential to your business’ long-term growth. It helps you protect each aspect of your business from unforeseen circumstances. And as importantly, it gives you the peace of mind you need, so you can better focus on the job at hand.

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