Business interruption insurance protects businesses from financial struggle that results from a natural disaster or Act of God. Many business owners may be wondering, is it really worth it? Business interruption insurance provides support in a challenging time due to a disaster and ensures that the business survives in the long run. To learn more about the costs and payoff of business interruption insurance, read below.
What is Business Interruption Insurance?
Every business faces unique risks because they’re in different industries and niches. However, one risk that is unavoidable for all businesses is natural disasters. Things like fire, water damage, hurricanes, tornadoes and earthquakes can cause lasting damage to a business.
Business interruption insurance can cover lost income from a natural disaster or Act of God. Enduring a disaster is difficult for anyone, but it will be even more challenging to recover financially as a business. But, with business interruption insurance, a business can maintain financial stability during a natural crisis. In addition, the insurance can help you rebuild your business to ensure that you become fully operational again.
Terms You Should Understand
Many businesses choose to get some form of business interruption insurance to protect their operations. Below are some common terms mentioned in business interruption insurance policies that are helpful to understand.
Business Income
The dollar amount of net income that a business would have earned if they did not incur a natural disaster or Act of God.
Period of Restoration
The amount of time required to repair and rebuild damaged property thereby allowing the business to become operational again. The period begins when the damage occurs and ends after a reasonable, agreed upon amount of time has passed where the property can be fixed. Usually this period is one to two years. During this period, insurers are responsible for the loss of business income.
Actual Loss Sustained
The overall loss a company incurs as a result of a natural disaster or Act of God. This includes physical damage and lost income over the period of time when the business is unable to operate.
What’s the Cost and Is It Worth It?
The cost of business interruption insurance can vary a lot based on numerous factors. The location of the premise, the business’s ability to relocate, the amount of coverage and nature of the business are a few factors that are considered when pricing out a policy. Business interruption insurance is frequently added onto property insurance. More often than not, you will receive a bundle insurance deal.
Whether or not the cost of business interruption insurance is worth it for you and your business depends on many factors as well. Some businesses are readily equipped to handle a disaster meaning the cost of insurance may not be worth their while. On the other hand, some businesses may not be able to handle the financial stress of an Act of God.
Before you veto business interruption insurance, consider what it gives you during a disaster or Act of God. At a high level, business interruption insurance pays for your operational expenses while you rebuild and covers unexpected costs resulting from the natural disaster. The financial support from business interruption insurance can save you lots of money and prevent your business from going under.
What Is Covered by Business Interruption Insurance?
Insurance can be tricky because of all the definitions and complex terminology within the policies. Below is a list of all the expenses that are covered by business interruption insurance.
- Lease or Rent Payments. Even if you’re closed for business, you’ll likely need to continue to make lease or rent payments for property that you don’t own.
- Loan Payments. If your business is carrying debt, you’ll be required to meet your loan payment obligations while your business isn’t earning money. Business interruption insurance covers this cost.
- Employee Salaries and Wages. Payroll is another expense that doesn’t stop when a disaster happens. Business interruption insurance will cover payroll while your business isn’t making money. Most policies cover up to one year of payroll.
- Taxes. You may evade death during a disaster, but you can’t avoid taxes! Whatever your tax obligations may be, you’ll have to meet them which is possible through business interruption insurance while your business is closed.
- Relocation Costs. If you’re forced to relocate your business, business interruption insurance will help you cover your moving expenses. There is a chance that the insurance would pay rent in the new location too.
- Lost Income. If your business is unable to operate as a result of a natural disaster, the insurance will pay you the revenue you would have made if the Act of God did not happen. This means your business will stay open even if you don’t have any business.
Does Business Interruption Insurance Payoff?
Sometimes insurance seems silly because you’re paying for something that may or may not happen. Although, in the event that something terrible happens and your business is forced to close, you’ll be ecstatic that you invested in business interruption insurance. No one knows what the future holds, business interruption insurance pays off in the long run!
