Unexpected disasters and disruptions can strike any business at any time, causing costly downtime and lost revenues. Having business interruption insurance or business continuity coverage in place is key to surviving incidents like fires, storms, equipment breakdowns, and even temporary shutdowns required by civil authorities. This comprehensive guide will provide small business owners, entrepreneurs, and risk managers the critical information they need to understand business continuity insurance, how it works, what it covers, what exclusions to watch out for, and how much coverage a company needs to withstand disruptions of various lengths and severity.
What is it: Business continuity insurance, also called business interruption insurance, covers income losses and expenses when physical damage or loss from a covered event forces a business to temporarily suspend operations.
Table 1: Detailed Comparison Between Standard Business Interruption & Civil Authority Coverage
| Coverage Type | Triggers | Included Protections | Excluded Perils | Maximum Coverage Duration |
|---|---|---|---|---|
| Standard Business Interruption | Direct physical loss of or damage to insured property premises that causes full or partial suspension of operations | Lost business income and normal operating expenses like payroll, taxes, rent, etc. Extra expenses with insurer approval | Flood, earthquake, power failure, communicable disease | Usually 12 months max from date of loss |
| Civil Authority | Property damage from a covered cause of loss to the area surrounding premises prompts government entities to prohibit access even if business property is undamaged | Pays lost business income + extra expenses while access is prohibited by order | Civil authority action not prompted by covered damaged property nearby business, pandemic exclusions may apply | Typically policy will specify max civil authority coverage period, such as 30 days |
Business interruption insurance, sometimes called business income insurance, helps replace income lost when your company suffers a temporary suspension of operations due to physical loss or damage from a covered cause of loss. It can also help pay continuing fixed operating expenses like rent, taxes, and loan payments while your business is closed, and extra expenses incurred during the period of restoration.
Purpose: Business continuity insurance enables you to survive a period with reduced or no cash flow. It covers financial losses so you can rebuild without going bankrupt.
How it Works: This type of insurance works by reimbursing you for lost net income plus necessary operating expenditures that occur during the disruption period. Calculations are based on your business’s financial records and projections.
Who Needs It: Any company that depends heavily on a physical location, key equipment, supply chain, or inventory is especially vulnerable to disruptions. However, even online businesses can benefit from this coverage in case they are impacted by cyber incidents, utility outages, or problems with critical infrastructure beyond their control.
Where to Get It: Business interruption insurance is typically sold as part of a business owner’s policy (BOP) or as an add-on to a commercial property/casualty policy. Stand-alone business continuity coverage is also available.
While business continuity insurance covers a wide range of losses associated with suspending your operations, all policies contain exclusions. Standard exclusions include:
Key Takeaway: While exclusions vary across insurers, it is vital to review your actual policy language to determine precisely what causes of loss will trigger your business interruption coverage and what limitations may apply. Don’t assume you are covered for a particular loss event without checking first.
The claim filing process for business interruption coverage contains some unique aspects since you are dealing with financial data rather than physical property damage. Here is what to expect:
Since claims payouts for business income losses can be substantial if companies experience lengthy restorations, premiums are priced accordingly based on risk factors like:
Business continuity insurance premiums can range anywhere from 0.3 percent to 4 percent or more of your requested coverage limit. On average, expect to invest around $30-$70 per month for every $100,000 in coverage. Higher policy limits equal higher dollar premiums but also offer superior financial protection from business interruptions. Review costs carefully when purchasing coverage limits.
Table 2: Comprehensive Business Continuity Planning Checklist
| Planning Element | Description |
|---|---|
| Emergency Response Plan | Documented procedures for assessing/responding to incidents, contacting response teams, evacuating premises, etc. |
| Offsite Data Backups | Regular backups of critical data, software, and records stored securely in the cloud or external location |
| Alternative Location Options | Evaluate feasible worksites to temporarily relocate staff/operations if premises are unusable |
| Infrastructure for Remote Work | Assess capacity for remote work across the organization; enhance as needed |
| Staff Cross-Training Program | Employees across teams are trained to fill in for a variety of business functions in an emergency |
| Key Supplier/Vendor Contacts | Maintain updated contact info and contingency instructions to provide key suppliers if you experience disruptions |
| Emergency Funds | Reserve emergency financial resources to sustain urgent operations for a minimum of 60-90 days if insurance claims delayed |
While business continuity insurance policies cover a wide array of perils that cause physical damage and loss, global disruptions on the vast scale of something like the COVID-19 pandemic usually fall into a “non-insurable” risk category for private insurers. Here’s why:
Simultaneous Impact: Localized disasters only affect an insurer’s policies in a single geographic region but nationwide or global interruptions like pandemics impact all policyholders simultaneously across every region. No insurer can handle such a volume.
Excluded Perils: After the 2003 SARS outbreak caused major insurance losses, insurers systematically added exclusions for viruses, communicable diseases, and resulting closures. Standard business continuity policies now have these exclusions.
Retroactive Changes: Proposed legislation to force insurers to pay claims for pandemic losses under existing policies raises constitutional issues about changing contracts retroactively. Insurers warn this could cause insolvency.
Lack of Reserves: Insurance works by collecting premiums from many businesses to create large reserves that cover potential future claims at localized levels. Companies do not pay actuarily sound premiums that would allow insurers to build reserves sufficient for nationwide shutdowns.
Bottom Line: Insurance regulators advise policyholders that “pandemic risk insurance” requires a systematic federal government-backed solution combining public & private dollars, much like terrorism risk and flood insurance programs. Absent these mechanisms, future pandemic losses likely remain uninsurable by commercial insurers alone.
While standard business interruption insurance within a BOP or property/casualty policy offers solid financial protection for many scenarios, additional coverages called endorsements or riders can customize protection even further:
If a property adjacent to your business suffers physical damage from a covered loss like a fire and the city prohibits access to your own undamaged premises as a result, civil authority endorsement pays for lost income/extra expenses during the access prohibition period.
Losses stemming from disruptions to your supply chain – like failure of a critical supplier – can be insured under contingent business interruption endorsements. Make sure suppliers meet the policy definition of “contingent” vendors.
Protects specifically against income losses from network security breaches, hacks, viruses, or denial of service attacks that disable critical systems. Ensure your cyber policy offers robust business interruption coverage for all types of cyber incidents.
In light of COVID-19, some insurers now offer communicable disease coverage endorsements or riders to cover income losses/extra expenses stemming specifically from future outbreaks, quarantines, and closures imposed by health authorities.
To better understand how business continuity insurance functions for different real-world scenarios, let’s review a few examples of possible covered claims:
Water Damage Example
A ruptured pipe inundates a small retail store, making the premises uninhabitable. Business income coverage pays the store’s documented lost profits plus any fixed operating expenses like rent, taxes, utilities, etc. that continue during the 3-month restoration. Civil authority coverage also pays for lost income when road closures prevent customer access for 1 week during repairs.
Fire Example
An accounting firm suffers smoke damage after a fire in their office building activates sprinklers on 3 floors. They relocate to temporary offices for 8 months during repairs. Their business continuity insurance pays relocation expenses, and lost income, and covers 65% of their normal operating expenditures like payroll and rent during the period until moving back.
Storm Example
A severe hailstorm damages equipment at a manufacturer. While structural repairs take 2 weeks, replacing custom machinery takes 4 months. Business income insurance pays for reduced operations during structural repairs. Extended business interruption coverage pays for income losses lasting through the 4-month equipment replacement period until normal operations capacity is restored.
Key Takeaway: These examples illustrate that business continuity insurance can pay substantial claim amounts to replace income for periods lasting many months depending on how long full operations remain curtailed after covered losses occur.
While business continuity insurance coverage represents an essential financial backstop that can literally mean the difference between sinking or swimming after calamity strikes, it should also be viewed as part of a comprehensive business continuity planning strategy every enterprise must create and maintain.
Elements of an effective continuity plan that complements your insurance coverage include:
✓ Documented emergency response/notification procedures
✓ Offsite data backups of critical systems/records
✓ Alternative temporary location options
✓ Infrastructure for remote working capabilities
✓ Cross-training plan for alternative staffing options
✓ Key supplier/vendor contingency contacts
✓ Emergency funds to pay bills until insurance payments arrive
Following prudent business continuity planning best practices and securing adequate business income protection will empower your company to survive and recover from virtually any type of disruption scenario it may ever encounter.
At Branco Insurance Group, our goal is to be your trusted resource for insurance education and protection. We want readers to walk away from our content with helpful insights and clarity around their options – not feeling pressured into buying anything.
While we offer solutions for many insurance needs at our agency, our aim through writing is simply to equip readers like yourself with the knowledge that helps safeguard all that matters most. We cover complex topics in an easy-to-grasp way so readers understand key terminology, evaluate risks accurately, and make fully informed choices.
In reviewing the specifics above around business continuity insurance, you likely have a much clearer grasp of what it is, what it protects, what gaps exist, and how much coverage your operations truly require to weather disruptions. We realize determining adequate protection levels involves first deeply understanding your unique vulnerabilities.
That is why at Branco Insurance Group, we invest ample time upfront counseling each client one-on-one about their needs before tailoring solutions. No risk profiles are alike so we customize. And should readers here have any lingering questions unanswered on business continuity or other coverages, we welcome you to reach out. Our expertise is freely yours for the asking with no obligations attached.
No, business income and business interruption are not exactly the same. Business income insurance covers lost income due to suspended operations from a covered loss event. Business interruption insurance includes coverage for lost income as well as extra operating expenses incurred during the disruption. So business interruption provides more complete protection.
Business interruption insurance coverage is triggered when there is direct physical loss or damage to insured property caused by a covered peril, which forces suspension of normal operations. Covered causes of loss may include events like fires, storms, floods, theft, vandalism, equipment breakdowns, etc. The policy will specify precisely which perils trigger coverage.
The main insurance solution to allow business continuation after a disaster is known as business continuity or business interruption insurance. This type of policy replaces lost income plus covers operating costs and extra expenses while repairs are made so operations can resume. Key features that facilitate business continuation include covering payroll, taxes, loan payments, relocation costs, and more during shutdowns.
No, business income insurance and business interruption insurance are very similar but not identical products. Business income policies mainly cover income lost from suspended operations after covered property damage. Business interruption insurance provides lost income coverage plus reimbursement for ongoing operating expenses and extra costs. So business interruption offers more complete protection during disruptions.
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