How to protect against business interruption
Business interruption is something that is fresh on a lot of business owners’ minds right now, and they’re still dealing with the fallout of the COVID-19 pandemic.
Not only did the pandemic interrupt businesses’ day-to-day operations, but it also led to extensive shutdowns so they couldn’t operate at all. It also impacted the economy significantly.
Then, that was all paired with civil unrest in some of the country’s major cities, and there have been a number of catastrophic weather events over the past year too.
These events have come together in a perfect or maybe not-so-perfect storm for business owners, leading them to think much harder about business interruption protection and what they can do to mitigate their potential losses by insuring their business against disruption.
The following are some of the big things for businesses to know about business interruption and how to protect themselves in these situations.
Business income or business interruption clause
Usually, a business interruption policy is purchased as part of your company’s property insurance policy. It’s meant to protect against income loss that comes about as a result of operational disruptions.
There’s also something called a contingent business interruption policy that provides insurance for monetary losses that are due to disruptions to your customers or suppliers.
For the vast majority of commercial property insurance policies, the coverage for business interruption kicks in when the policyholder has a physical loss of their insured property by a loss that came from a covered cause.
What a lot of business owners and policyholders found out the hard way was that coronavirus didn’t automatically qualify for business interruption insurance because the physical loss wasn’t met, or at least that’s what insurance companies argued.
There isn’t a hard and fast rule for when there is a physical loss sustained by insured property.
If your business does close down or is interrupted because of a covered loss, then your insurance might cover the revenue you would typically make, mortgage and lease payments, loan payments, and taxes. It might also cover moving costs and employee payroll.
Beyond business interruption insurance, there are other types of available coverage that you might now want to consider having.
What’s not covered
Business interruption insurance almost never covers certain things. First, as again you may have realized, it doesn’t cover communicable diseases leading to shutdowns in your business.
Business interruption insurance typically won’t cover damage from floods or earthquakes, or utilities.
Accounts receivable insurance
If you bill your customers, as many businesses do and then you were to lose your records, you might have customers not paying their bills.
Accounts receivable insurance is a way to mitigate some of the losses that could stem from an inability to collect from your customers.
It could also cover the costs to reconstruct your accounts receivable records.
Some businesses will have accounts receivable insurance as part of their computer insurance. This coverage does not, however, protect against losses from bad debt.
Contingent business income insurance
If you were to be a business that depends on a few primary customers, or you buy from one major supplier, you might benefit from contingent business income insurance.
If your customer or your supplier were to deal with damage because of a loss, then you, as the business that depends on that customer or supplier for your own survival, might also experience damage.
That’s where contingent business income insurance can come in.
You can protect yourself from a potential loss that would stem from damage that occurs on the premises of your supplier or primary customer.
In some cases, if you’re in a shopping center, you might also find advantages in this coverage if an anchor store experiences damage and that store draws in many of your customers.
Extra expense insurance
If you’re a service business, you need to be in operation, at least to the extent that you’re serving your customers, no matter what. If you’re a service business, then you might need extra expense protection on top of your business income insurance.
Extra expense coverage covers the expenses that you incur as your business premises is being restored, and the idea is that you wouldn’t have incurred these expenses were there no damage or physical loss.
Dealing with supply chain risks
Sometimes your business experiences a loss not because of what happens on your premises but because of a disruption in your supply chain.
You have to find strategies to mitigate supply chain risk.
In that case, you might want to explore contingent business interruption coverage, which helps protect you against losses or disruptions at your suppliers’ locations.
Again, there are limits to this. It only protects you if the supplier you’re dependent on experiences physical property damage. It doesn’t cover everything, nor does it cover you if a business is inaccessible and employees can’t make it to work.
A contingent business interruption policy will typically require that you identify your specific suppliers and also your customer locations. If you were to change your suppliers and not tell your insurance company, your policy wouldn’t cover you.
Along with insurance, to reduce your supply chain risk, you need to have backup vendors and suppliers available.
Period of restoration
Finally, there’s something to be aware of called the period of restoration.
An insurance company is responsible for loss of business during the period of restoration only.
The period of restoration starts at the time the loss or damage occurs.
The idea is that you have a responsibility to make the repairs reasonably quickly so that you can resume normal operations.
There are just a few of the different aspects of protection available as far as business continuity. It’s important that you assess all of the available options and also do a risk assessment of your particular business.
It’s very likely that you’ll need layers of coverage to truly have protection, as many businesses have found out over the past year.
Along with that, you need to regularly assess your coverage and look for any potential gaps.