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What is Business Interruption Insurance?

If you are looking at quotes for insurance for your business, then you will probably have seen the option for business interruption coverage to appear as an extension to some of the commercial insurance policies you have viewed.

Buying business interruption coverage will add a little bit to the cost of your insurance policy, but it is a worthwhile addition. Here, we explain what business interruption insurance is, what it covers, and answer some of the typical questions that arise from business owners who need to buy coverage for their company.

What is Business Interruption Insurance?

This type of commercial insurance will replace company income in the event of a covered disaster, such as a natural disaster or fire for instance. Business interruption coverage is not sold as a standalone policy; you will usually only be able to buy this as an extension or add-on to another type of commercial insurance policy. Payouts are generally based on previously recorded profits, but each insurance company will provide you with the specific terms of coverage for their individual policy offerings.

What is covered by business interruption insurance?

When you buy business interruption insurance, it will replace the lost income your business is unable to collect following a covered event, such as a natural disaster or a fire. It can cover your operational expenditure, and a move to temporary premises if this is required.

Here is a detailed breakdown of what a business interruption policy will cover.

Profits. Based on prior months' performance, a policy will provide reimbursement for benefits that would have been earned had the event not occurred.

Additional Expenses – Business interruption insurance will provide you with reimbursement for expenses that are considered to be reasonable, beyond any usually fixed costs, and which enable the business to continue its operations and gets back to its usual standing. 

Civil Authority Egress / Ingress – An event may occur which could lead to a government-mandated closure of a commercial property that will directly cause a financial loss. For instance, a street closure that relates to a covered event or a forced closure due to curfews issued by the government.

Commissioning and Training – Following a covered event, a company many need to pay to replace their machinery, and then retrain individuals on the correct and proper use of the new equipment. In most cases, this type of coverage will pay for these costs.

Fixed Costs – This could include your company's operational costs, along with any other incurred costs of continuing your business.

Loan Payments – Because most loan payments are due on a monthly basis, and therefore form an essential part of the operational costs a company incurs. Business interruption insurance will help your business to meet those repayments while you are unable to earn an income.

Staff Wages – Covering the employee wages during a business closure is something that is company owners should ensure they can do. Buying business interruption insurance can give you complete peace of mind that should a covered event occur, your company can meet its payroll obligations, even when you cannot operate.

Taxes – Even when your company cannot operate, you are still required to pay your taxes on time. Tax coverage as part of your business interruption insurance will ensure a company can meet its tax obligations and avoid any late payment penalties by doing so.

Temporary Business Location - Most business interruption policies will provide coverage for any costs associated with moving and operating your business from a temporary location.

Does business interruption insurance cover wages?

Yes, it does. If needed, it can cover the payroll, along with any loan repayments under the heading of ‘operational expenses.’

Who needs to buy business interruption coverage?

If you are trying to establish whether you need business interruption coverage, you should consider this type of insurance to be just as crucial to your company's survival as fire insurance. If you fail to prepare your business adequately for a disaster, then it can cause you to face severe financial stress. Most companies would not consider avoiding the purchase of fire insurance, and while this will help your business premises and property to be recovered, it will not help you between the event occurring and the time your business is able to re-open. For some people, this might be a matter of weeks to some companies, and for others, it could be months.

If your business cannot serve the needs of your customers for an extended period of time, then you may lose customers to your competitors. If you cannot pay your staff their wages, then you might lose their loyalty too.

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