How business interruption insurance protects your livelihood

If you have a small business, your livelihood can be put at risk if a storm, fire or other disaster makes it impossible to operate for a period of time. As Hurricane Sandy reminded us, such disasters can strike at any moment. However, business interruption insurance can help you navigate through those tough times.

Unlike a standard property insurance policy, business interruption coverage provides money to cover lost income and everyday expenses. “Most businesses both large and small need this coverage,” says Elizabeth Christopher Giannetti, a spokeswoman for Nationwide.

In many cases, business interruption insurance is sold as part of a package – known as a business owner policy (BOP) – that includes property insurance and liability insurance. It also can be sold as a standalone policy.

What is covered?

Business interruption insurance coverage kicks in when a business must suspend its operations while it picks up the pieces.

Coverage may include:

  • Income replacement. While your business is sidelined, the insurance can provide income equivalent to what you earned when the business was open.
  • Business costs and expenses. These include rent, utilities, vendor payments, paychecks and taxes.
  • Moving and operations costs. If you have to temporarily set up shop elsewhere, the costs are covered.
  • Extra expense coverage. This insurance covers extra expenses a business must pay beyond its normal expenses just to keep from shutting down after a disaster.

April Eaton, a spokeswoman for Allstate, illustrates how the insurance works by citing the example of a physician whose office is damaged by fire and must be shut down for repairs. business-interruption-coverage

“Business interruption insurance can help the physician open a temporary office and provides additional expenses he may need due to the temporary office setup,” she says.

Most business interruption insurance policies come with a 48-hour waiting period before coverage kicks in, according to the Insurance Information Institute. A deductible may apply.

“The loss or damage must be caused by or result from a covered cause of loss,” Giannetti says.

One example of a covered loss might be a tree that falls on a commercial building and damages a roof or the structure badly enough to halt operations, she says. Another example: a power surge that leads to a fire, destroying the business’ building.

A business may depend on suppliers that provide raw materials or goods crucial to the business’ success. If your business relies on outside suppliers, consider two other forms of coverage: contingent business interruption and contingent extra expense insurance. With this type of coverage, your business will be compensated if your supplier is unable to deliver materials.

How much does it cost?

The cost of business interruption insurance varies depending on the nature of the risk surrounding your business and the extent of coverage you choose, says Loretta Worters, a spokeswoman for the nonprofit Insurance Information Institute.

“There is no typical price,” Worters says. “You’d have to review all your risks with an insurance broker to get an idea.”

For example, a restaurant may be charged a higher amount because of the higher risk of fire than at some other businesses, Worters says.

Other factors can affect price. A real estate agency might pay lower premiums than a restaurant because it’s easier for the agency to temporarily relocate after a disaster, she says.

When buying a policy, make sure you obtain enough coverage to last you until your business bounces back.

For example, Allstate offers coverage through a standard BOP that lasts for up to 12 months. Or you can buy a commercial package policy (CPP) and select both a maximum amount of payout and maximum period of coverage.

When shopping for a policy, also look closely at what is and is not covered by a business interruption policy. A policy is likely to reimburse your lost income after a windstorm or fire, but may not do so after a flood or earthquake. It may be possible to buy endorsements (or add-ons) that will cover the excluded events.

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