Small Business Insights: The Importance of Business Interruption Insurance

Small businesses regularly face several risks—such as natural disasters—that could necessitate a temporary shutdown or reduction of operations, which can have devastating effects on a business. According to the Federal Emergency Management Agency, 25% of businesses don’t reopen after a disaster.

Safeguarding Against Unexpected Disruptions

One way businesses can protect themselves from the financial impacts of these occurrences is by securing business interruption insurance. The National Association of Insurance Commissioners estimates that 30-40% of small business owners carry this type of coverage.

Business interruption insurance can offer valuable assistance following a covered event. This post provides more information about this coverage, including what it is and how small businesses can obtain it.

What Is Business Interruption Insurance?

Business interruption insurance, also known as business income insurance, provides a financial safeguard against temporary revenue losses and extra expenses that result from covered business shutdowns or reductions of operations. For example, if a fire or a vandal damages a company’s building and leads to a temporary closure, business interruption insurance can provide financial assistance while the building is shuttered for repairs.

Policies may also offer coverage if a civil authority (e.g., a local, state or federal governmental entity) forbids business premises access. This may happen following a natural disaster, even if the business’s property is not damaged. Each policy is unique, and businesses should work with their broker to fully understand the scope of their coverage.

Why Do Small Businesses Need Business Interruption Insurance?

Small business shutdowns created by unforeseen events can have significant financial ramifications. In these circumstances, business interruption insurance can provide coverage for the following:

• Lost income. Business interruption insurance can help replace the revenue a business would have generated if it did not need to close temporarily.
• Continued operating expenses. Business interruption insurance can also provide financial assistance to cover standard, ongoing operating expenses such as salaries, taxes, utilities and mortgage, lease or rent payments due during the impacted period.
• Relocation costs. Business interruption insurance coverage can also offer financial assistance for moving expenses if a business needs to relocate to a temporary office.

Additionally, a specialized form of business interruption insurance known as contingent business interruption insurance offers coverage if disruptions in the supply chains create losses. For example, suppose property damage to a third-party vendor impacts a business’s capability to continue its operations. In that case, this coverage may mitigate the resulting financial impact. It can typically be added as an endorsement to a standard business interruption policy.

How Do Small Businesses Obtain Business Interruption Insurance?

For small businesses, business interruption insurance is typically bundled with commercial property and liability coverage in a business owners policy (BOP). Businesses with 100 or fewer employees and revenue of $5 million or less may be eligible for a BOP that includes business interruption insurance. Business interruption insurance may be available as a standalone policy or added to a commercial property policy for businesses not eligible for a BOP. Businesses must review their coverage to determine if business interruption insurance is included.

Talk with an Expert

Business interruption insurance can provide crucial financial assistance for small businesses if they need to shut down or reduce operations temporarily. Contact us today for more information on this type of insurance or to learn more about how Hylant can help you protect your small business.

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