Business Interruption Insurance: What You Need to Know
Any time a natural disaster or man-made crisis strikes, businesses often must suspend operations or operate at reduced capacity for a time. Business interruption insurance can protect business owners against financial losses in these situations. However, it doesn’t normally cover every kind of disaster or every kind of loss. That’s become clear during the coronavirus pandemic, as business owners have learned their policies don’t cover losses related to a disease. In this blog post we’ll discuss what is, and isn’t, covered by this type of business insurance.
What is Business Interruption Insurance?
Business interruption insurance is a type of coverage that can be added onto a commercial property insurance policy. It may also be included in a commercial package policy. This type of coverage is not sold separately.
Business interruption insurance provides extra coverage in addition to policies protecting against damage to property caused by perils such as fire and windstorms. It can help businesses replace lost income and cover the extra expenses created when disaster strikes.
Among the losses interruption insurance can compensate businesses for are lost revenue, rent and lease payments, mortgage payments, other loan payments and taxes. Employee payroll may be covered, along with costs of having to relocate temporarily or permanently to new premises.
When Business Interruption Can Help
Compensation under a business interruption policy is triggered when the business must vacate its normal premises due to disaster-related damage covered by the property insurance policy. Fire, for instance, is normally covered by these policies.
This sort of coverage can be very important for businesses impacted by disasters, especially ones with major economic shocks. It can help them start back up quickly after the event is over, avoiding losing business to competitors and otherwise maintain operational continuity. Unfortunately, there are many potential disasters that aren’t likely to be covered by business interruption insurance.
What Is and Isn’t Covered
A disaster, such as a hurricane, that inflicts financial damage on physical property is most likely to be covered by business interruption insurance. Fires and destructive winds are risks often covered by commercial property and, therefore, are likely to be covered by many business interruption policies.
Other risks are less likely to be covered. For instance, in addition to causing loss of life, a pandemic can be very costly to businesses by disrupting supply chains, causing employees to miss work because of illness, keeping customers from shopping due to quarantines and more. But, while their impact in human terms can be tremendous, pandemics don’t cause property damage resulting in income loss. They sicken people, but don’t directly harm property. So pandemic-related losses are not likely to trigger payouts under standard business interruption insurance policies. Risks for such a disaster are not well understood and pricing is difficult.
However, one recent exception is PathogenRX, a product launched by insurance broker Marsh in 2018 to provide financial protection for companies hit by an infectious disease outbreak. The policy is underwritten by Munich Re.
Many other potential causes of loss may not be covered either. They include power failures, nuclear hazards and pollution. Some policies offer endorsements that will cover earthquakes and floods, but these are generally not included in standard policies.
Other Interruption Insurance
Different types of business interruption insurance protect against related losses. For instance, contingent business interruption insurance can compensate businesses for covered losses to a supplier or customer.
However, losses caused by a pandemic are not likely to trigger payouts on contingent business interruption insurance policies. Again, the reason is that a disease outbreak doesn’t directly cause property damage.
Supply chain risk insurance is special coverage against business interruption caused by disruptions to the business’ supply chain. Unlike other business interruption, it can be triggered when there is no damage to physical property. Many businesses faced just this sort of risk when the coronavirus, which originated in China, forced the closure or isolation of many Chinese factories supplying goods.
Another endorsement that may be added to a commercial property policy is extending civil authority coverage. This can provide business interruption coverage if the government orders businesses to shut down, as has happened in past pandemics such as the Ebola outbreak and again with the coronavirus episode.
Yet another sort of pandemic-related loss a business can incur is they are found liable for enabling the spread of a disease. This sort of loss is likely to be covered by a standard commercial general liability.
Environmental insurance is a type of coverage that some businesses have and that may protect against pollution-related losses. This type of insurance has paid out to businesses impacted by diseases in the past – specifically Legionnaire’s disease – but much depends on the exact terms of the policy.
Business interruption insurance can provide essential financial assistance to commercial enterprises forced to shut down due to physical damage to covered property caused by a disaster. Not all disasters are covered, however, and in most cases pandemics like the coronavirus outbreak will not be covered.
There is debate regarding whether business losses caused by the Coronavirus outbreak or mandatory closures are covered under these insurance policies.
Whether or not your business is covered for loss of income resulting from COVID-19 is a complex question that requires a review of your insurance policy. If you are interested in exploring your options please call Rose Sanders Law Firm, PLLC at 713-231-9288 today for a free consultation.