If your business was temporarily unable to operate due to fire or theft, would you be able to manage without income while your business is being rebuilt or restored? This is where business interruption insurance, also known as business income insurance can be a real lifesaver, while you are waiting to get your business back up and running.
Typically not sold as a separate policy, business interruption insurance is either included in a comprehensive policy or can be added to a property/casualty policy that determines the amount of coverage you can obtain.
As a small business owner, you know that it is critical to protect the source of income your business brings in, especially if it is your sole source of income. This is when business interruption insurance truly offers real peace of mind. In the same way that you would insure your commercial property against fire as part of your standard property/casualty policy coverage, business income insurance helps defray your costs and expenses owing to lost income while you repair and restore your operations in the aftermath of a natural disaster.
When looking for coverage options to help ward against financial ruin in the event of a natural disaster, talk with your broker who can help you identify the ideal policy to protect your income flow in the event of a business outage. Some additional things to consider include:
|Coverage||When You Need it||Points to Consider|
|Profits or Earnings||If you rely on a fixed premises for income||Covers income or profits if you can’t operate due to a valid buildings claim. Client will typically need to itemize various lines of their P&L to calculate the insured amounts. Profits and Earnings coverages are different.|
|Rental Income||If you receive income from property that is rented / leased to others.||Many building owners will rent or lease parts of their property so this is key.|
|Contingent Business Interruption||If your business relies on specific suppliers or others in order to operate.||Covers your business for loss of earnings / profits if it can’t operate due to a supplier who is out of action because of a claim that would have been covered on your own property had it happened to you.|
Contingent business interruption, or CBI insurance is an extension to other insurance that reimburses lost profits and extra expenses resulting from an interruption of business at the premises of a customer or a supplier.
Unlike typical business interruption insurance that compensates a policyholder for a loss resulting from damages to its own property, CBI allows for a transfer of risk of certain losses to the property of a third party.
Companies often purchase this type of insurance as an extension or add-on to their standard commercial property insurance. It is also known as contingent business income insurance or dependent properties insurance.
CBI insurance applies if there is:
While the concept of contingent business interruption is simple enough, determining what is a covered cause of loss is a more complicated assessment.
Identifying coverage restrictions of CBI insurance is important, as the breadth and scope of coverage can vary between policies. There are also coverage limits on most CBI insurance policies.
Companies making a claim under business interruption insurance will use a calculation involving several variables to determine their loss from the interruption, such as time (e.g., how long the interruption of business lasted), quantity (e.g., the number of units of goods or services that are normally produced), and value (e.g., the financial value of units normally produced, usually expressed as profit).
Additional considerations for calculating business interruption include the maximum indemnity period of your policy, expenses saved or that ceased during the interruption, projected sales numbers based on historical trends and year-over-year comparisons, and any working costs associated with the resumption of business.
The International Risk Management Institute has published a helpful backgrounder on calculating business interruption losses.
The short answer as of August 2020? “Probably not but in a small number of circumstances, yes.” The COVID-19 pandemic is an unprecedented disruption and there is uncertainty about the legalities of whether or not COVID-19 will be considered a direct physical loss or damage to the business.
Canadian case law has no firm definition for what is meant by “direct physical loss or damage.” Lawsuits have already begun in Canada and the United States revolving around business interruption claims and will provide direction in the months and years ahead on whether COVID-19 is considered a direct physical loss or damage to the business.
Some Canadian insurance companies have previously offered outbreak- or pandemic-specific policies, given that most specified perils or all-risks policies did not include coverage of a pandemic. The exact language of these policies is crucial, as they may include exceptions to coverage for viral outbreaks.
Typically, business interruption in the context of insurance coverage relates to losses sustained by a policyholder due to an insured “peril” such as fire, burst pipes, flood/natural disaster, power outage, cyber events, supplier failure, and machinery breakdown.
General liability insurance covers your business for claims related to tangible property damage, bodily injury, and advertising injuries that result from your products and/or business operations.
Business interruption insurance is not directly related to general liability insurance and kicks in when your property has been damaged. General liability insurance kicks in if you are responsible for injuring people or damaging their property.
Both general liability and business interruption insurance are integral components of a robust insurance program.
Business income is closely related to business interruption insurance and the terms are sometimes used interchangeably.
Basically, business interruption insurance coverage aims to replace your business income during the period of interruption. Think of it as “making your business whole again.”
Business income refers to the net income the business would have earned had the business not been closed and remained operable, and also considers normal operating expenses that continued despite the suspension of operations.
Business income coverage applies to losses that occurred during the time required to repair the losses or damages, and can be extended to apply to cover expenses for a reasonable amount of time beyond the specified period of suspended operations. Usually the coverage lasts throughout the “period of restoration,” which is the time period reasonably required to restore the business to its previous state before the damages occurred.
Business income is sometimes used by insurers to describe their business interruption coverage. Business income insurance coverage is often subject to either a waiting period or a monetary deductible.