Business Interruption Insurance 101

Continuity is critical in business, and few things are more important than continuous revenue and cash flow. Just one brief business interruption can be incredibly costly for an organization, often leading to serious reputational damage or long-term closures.

Business interruption insurance and contingent business interruption insurance can help provide important protections.

What Is Business Interruption Insurance?

Business interruption insurance provides protection against a variety of common interruptions, including natural disasters, equipment damage and vandalism. Consider the following scenario:

A mid-sized auto dealership had to move its operations to a new location when its lot flooded. It had to sign a new lease and cover steep moving expenses. The company's business interruption insurance policy reimbursed the organization for the costs associated with a move.

What Does Business Interruption Insurance Cover?

The following are some other major benefits of business interruption coverage:

• Revenue. In the event of a disruption, business interruption insurance provides coverage for income your business would have earned during a closure period if it had been operating normally.
• Rent or lease payments. Even if your premises are unusable after a disaster or other event, many leases still require you to make payments. Business interruption insurance allows you to continue making rent or lease payments, even while your business is not operating.
• Relocation. If your primary location is unusable following a disaster or other event, you will likely have to relocate to remain open and continue generating revenue. Business interruption insurance can cover the expenses of moving your business to a temporary location and may include both moving and rent costs.
• Employee wages. If you cannot operate, you will likely be unable to continue paying employees. Business interruption insurance can help you avoid losing staff while you’re closed by ensuring that you make payroll. This is especially important, as finding new employees is often more expensive than keeping them.
• Loan payments. If you have an outstanding loan, you must continue making payments even if your business isn’t fully operational. Business interruption insurance will ensure you never miss a payment until you are fully operational again.

What Is Contingent Business Interruption Insurance?

What happens when one of your suppliers or customers experiences an interruption that derails your operations? To help address this concern, contingent business interruption (CBI) insurance is crucial. CBI exposures will differ depending on your industry but are most common in manufacturing, retail, hospitality and professional services.

Consider the following scenario:

A custom cabinetry firm's business came to a halt when its primary supplier—a nearby lumberyard—experienced a large-scale fire that wiped out all of its stock. Several cabinet orders had to be postponed until a new supplier could be secured, leading to lost revenue and harming the company’s reputation. The company's CBI policy covered ongoing expenses—including payroll and rent—because interruptions at a third party impacted the insured’s revenue stream.

What Does Contingent Business Interruption Insurance Cover?

CBI insurance is crucial and has several unique benefits:

• Coverage beyond standard business interruption policies. Unlike traditional business interruption insurance, which compensates the policyholder for a loss resulting from damage to its own property, CBI insurance lets businesses transfer the risk of certain losses to the property of a third party.
• Reimbursement for a number of expenses. When in place, CBI insurance can help employers cover ongoing expenses—like payroll and rent—should the insured’s revenue stream be impacted by interruptions at a third party. In many cases, the customer or supplier doesn't need to be totally shut down to trigger CBI insurance.
• Protection for a variety of scenarios. In the policy itself, the covered third-party property may be specifically named, or the coverage may simply blanket all customers and suppliers. There are a variety of scenarios where this type of coverage is useful, such as when an insured business depends on a single supplier or a handful of suppliers for materials. It’s also useful when a business relies on a single or a few key customers to purchase goods or services or when a business depends on a nearby attraction or neighboring commercial operation for customers.

Learn More About Business Interruption and Contingent Business Interruption Insurance

Business interruption and CBI insurance policies are designed to give businesses access to the assets they need when they need them most. However, these policies can be complex. It’s important to work with your insurance broker closely when seeking coverage. To learn more, contact us today.

Related Reading: Business Interruption Insurance: Importance of Pre-Loss Value Reporting

The above information does not constitute advice. Always contact your insurance broker or trusted advisor for insurance-related questions.