Business interruption insurance steps in when your business needs to close doors for repairs after an accident or weather disaster. It covers you for losses related to operating your business, such as lost revenue or increased operating costs. You choose how much revenue to cover and the time period you’ll receive benefits.
Business interruption insurance protects you against losing income if an unforeseen situation forces you to shut down. It can also kick in if you keep your doors open but need to scale back or operate at a higher cost than normal. You’ll get protection for business closures that last longer than your one- or two-day waiting period.
For example, if vandals destroy your jewelry shop and steal expensive rings, commercial property insurance can repair damage and replace the jewelry. But business interruption coverage can help with lost revenue from sales while you’re closed.
Understand more about how business interruption insurance works with these common insurance words:
Business owner’s policy (BOP) – This policy package includes general liability, commercial property and business interruption insurance.
Restoration period – The time period from the accident or loss to the time you resume your normal business operations
Coverage limits – A business interruption policy includes a maximum dollar amount and time period that it will cover your lost business income. However, you can choose the limits based on your business’s needs.
Waiting period – An amount of time that must pass before your insurance kicks in, typically a few days.
Business income insurance – Another name for business interruption insurance
How business interruption insurance can help during the coronavirus
Your business interruption coverage is unlikely to help if you shut your doors because of the coronavirus. Current lawsuits between businesses and their insurance companies are playing out throughout the country. If you’re wanting to press this point with your insurer, you could have a case in specific scenarios:
Direct physical loss to your business. In most cases, you’ll need to prove the coronavirus caused direct physical damage to your business. While the virus probably won’t damage your business’s structure, you might have an argument if a case is found on or near your premises. Even then, you may have a tough time proving a physical loss.
Contingent business interruption. This type of policy covers supply chain interruptions, a likelihood in the current coronavirus situation. If a manufacturer or distributor stops or limits its product, you could activate coverage. But again, you may need to prove direct physical damage to your business.
Loss of attraction. Damage to nearby attractions or businesses might give you another case if those businesses attract customers to you. However, you’ll legal help to prove this tough argument to your insurer and the courts.
Case-by-case coverage. Businesses are closing their doors for many reasons related to the coronavirus. If you’re unsure whether your situation qualifies for coverage, talk with your insurance company or legal advisor for specific answers.
What situations might get excluded?
Not every business will get reimbursed for closing its doors, including these situations:
Your policy excludes disease or biological factors.
You close voluntarily to prevent spreading the virus.
You close for an extended time. — This coverage may cover only the time you need to sanitize before reopening unless you can prove a high risk for re-contamination.
You don’t meet the waiting period — Most policies require a few days to pass before you can get benefits. If you close for a few days to sanitize, you may not meet the time requirement.
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What does business interruption insurance cover?
Business interruption can cover full closures as well as other situations like:
Increased operating costs to maintain normal revenue
Fixed operating costs like taxes, employee wages and rent
What types of losses are covered?
Business interruption insurance covers any situation also covered under commercial property insurance. However, that means losses from earthquakes, flooding, power outages or damage to a neighboring property may not be included. You’re protected against:
Wind and hail
Theft or vandalism
Aircraft or vehicle not owned by the business
Automatic fire sprinklers
Building or sinkhole collapse
Sewer or water drain backups
Do I need business interruption insurance?
Many businesses benefit from covering interruptions to your revenue stream. Reasons you might need this insurance:
Your business can’t survive a shutdown. Consider insurance if shutting your doors temporarily would devastate your business.
You pay a lot in rent. You might need backup if your business closes for repairs, so you can pay rent or loan repayments.
You keep inventory on hand. Damaged inventory can take time to replace, causing you to lose money every time you turn a customer away.
You own a brick-and-mortar. A shop that serves customers in person may take a harder hit than other businesses.
You pay employees. You can continue paying employees and avoid training new recruits when you open again.
You rely on special equipment. You can keep your business going while waiting to repair or replace equipment, such as in factories.
How much coverage do I need?
To figure out what limits to set for your business interruption policy, you can estimate your annual and monthly revenue using your sales history and projected growth. Then, think about how long your business might take to reopen in different situations, including a worst-case scenario.
Next, multiply your expected monthly revenue by the number of months you’ll need to restore your business. You might factor in costs to relocate or continue emergency operations. This gives you an idea of how much coverage you might need. However, check with an insurance professional to make sure you’re buying enough coverage.
Case study: Nick’s bicycle shop
Nick Thomson runs a family-owned bicycle shop that anticipates $200,000 in revenue this year. Nick believes he could resume running the shop in a worst-case scenario after six months, limiting coverage to $100,000. When a fire causes Nick to partially close doors for four months, his insurance payment includes:
Nick’s lost revenue is calculated based on actual sales, rather than the coverage selected.
The insurance company saved money by helping Nick reopen doors in a different location earlier than expected.
Higher operating costs
Nick saw higher expenses for reopening in a new location while still paying fixed costs for the usual shop. These may offset by costs Nick won’t pay during this time, such as electricity.
Nick spent money on local advertising to announce his shop’s temporary location.
Waiting period losses
The bicycle shop absorbs the lost revenue and operating costs during the 48-hour waiting period.
Business interruption insurance can stave off revenue losses after damage covered by your property insurance happens. Weigh the benefits of different business insurance companies to meet your insurance needs.
Frequently asked questions about business interruption insurance
Business interruption insurance covers lost revenue after a covered event. This policy includes fixed costs that can’t be cut off while the doors are closed.
Business overhead expense insurance pays for overhead expenses like rent and employee wages if the business owner becomes disabled. This insurance may include costs for finding a replacement if the owner can’t resume responsibilities.
The cost of coverage depends on several factors, especially whether you’re adding it to a business owner’s policy. For example, Progressive Commercial says that the average cost of its 12-month BOP through the Progressive Advantage Business Program was about $60 a month or $720 a year. Other factors that affect the cost:
Amount of coverage
The time for a claim’s settlement depends on the insurance company, the amount of paperwork and your state’s guidelines for settling claims. Some states set specific deadlines like 60 days, while others require a settlement within a reasonable timeframe. Make sure you understand your state’s laws and insurance company’s reputation ahead of time.
Willam Eve is the country manager for Finder's Canada operations. He has previously held the positions of group publisher of insurance for Finder Australia and lead publisher for the Finder global team. William has a Bachelor of Communications from the University of Technology Sydney, Australia. He loves the challenge of launching Finder into new markets while helping grow Finder’s global team.
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