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Business Interruption Insurance: Essential Coverage for Your CNY Operation

March 25th, 2024 | 7 min read

By Daniel J. Middleton

Business interruption insurance

Every business owner faces the fear of an unexpected closure. A fire, storm, or even a power outage can force you to shut down, leaving you scrambling to cover lost income and expenses.

At Horan, we understand the critical role your business plays in your life and your community. That’s why we recommend business interruption insurance, designed to help you weather the storm and get back on your feet.

In this article, we'll explore how business interruption insurance protects your income and expenses during a closure. We’ll also touch on what’s covered and what's not, including the surprising case of COVID-19 and similar catastrophic events.

How Business Interruption Insurance Pays for Your Lost Income and Expenses

As a Central New York business owner, you probably know that you need insurance to cover the costs of physical damage to your property or liability claims from others. But what about the income you lose when your business has to close temporarily because of a fire, a storm, or other disaster? 

That’s where business interruption insurance comes in.

Business interruption insurance pays for the income you would have earned if your business was operating normally. It also covers the expenses you still have to pay even when you’re closed, such as 

  1. rent
  2. utilities, and 
  3. payroll

This way, you can keep your business afloat and your employees happy until you can reopen.

Most businesses, especially small ones, don't have enough cash reserves to survive a long period of closure. They might be able to fix their property and settle their liability claims, but they can't make up for the lost revenue. 

Without business interruption insurance, they might have to lay off their staff, default on their loans, or even go out of business.

That's why business interruption insurance is essential for your CNY business. It can protect you from the worst-case scenario of losing your business and your staff because of a temporary closure. It can give you composure and financial security in times of crisis.

How the Time Deductible Works for Business Interruption Insurance

Business interruption insurance has a deductible based on time, not money.One thing to know about business interruption insurance is that it has a deductible based on time, not money. That means you have to wait a certain number of days before you can make a claim. The insurance carrier wants to avoid paying for minor or short-term interruptions that don't affect your business significantly.

For example, suppose a water main breaks in front of your Liverpool restaurant on a Saturday evening. That's a bad time for you, because you lose your dinner rush. You might miss out on thousands of dollars of income. 

But if the water main is fixed by Sunday morning, and you can reopen, then you don't qualify for business interruption insurance. That's because it's less than 24 hours of closure, which is the minimum deductible for most policies.

The standard deductible for business interruption insurance is 72 hours, or three days. That means you have to be closed for at least three days before you can get paid for your lost income and expenses. 

Some carriers let you lower the deductible to 24 hours, but not less. And some carriers will pay you retroactively from the time of the loss, but only if you meet the deductible.

That's why business interruption insurance is meant for long-term closures that can seriously hurt your business. It's not for minor inconveniences that you can recover from quickly. You have to be prepared to handle those on your own.

How Utility Failure Can Trigger Business Interruption Insurance

Another type of coverage that can affect your business interruption insurance is utility service interruption coverage. This is an endorsement that covers the loss of income and expenses caused by a failure of utility service, such as electricity, gas, water, or communication, that originates away from your premises.

For example, if a storm damages a power line that supplies your building, and you have to close because you don’t have power, this coverage can help you.

Lightning striking a utility pole in Central New York

Utility service interruption coverage is different from other types of property damage or liability claims you can make through your commercial property or general liability policies. It doesn’t matter if your building or equipment is damaged or not. It only matters if you can’t operate your business normally because of the utility failure. 

Some businesses might be able to cope with a temporary loss of power, but others might not. It depends on the nature and location of your business, and the type and duration of the utility failure.

But you can’t claim business interruption insurance for utility failure unless you have utility service interruption coverage. They’re linked together. Without the endorsement, you won’t be covered for the loss of income and expenses caused by the utility failure. That’s why you need to check your policy and see if you have this coverage or not.

Business interruption insurance is a way for you to get paid for the income you lose when you can’t run your business due to a covered claim. But you need to have the right endorsements and coverages for the specific types of claims that can affect your business. Utility service interruption coverage is one of them.

How Business Interruption Insurance Covers Your Employees’ Tips and Other Income

Another benefit of business interruption insurance is that it can cover the tips that your employees would have earned. This is especially important if you're a restaurant owner. 

Your employees rely on tips as part of their income, and they might lose them if your restaurant has to close. Business interruption insurance can make up for that loss and keep your employees satisfied.

The main purpose of business interruption insurance is to replace the income that you lose when your business can't operate normally. It helps you maintain your cash flow and pay your bills. 

But it only applies to covered circumstances, such as fire, storm, vandalism, or other disasters. You have to check your policy to see what's covered and what's not.

Business Interruption Insurance Has Its Limits

There are also some exclusions and limitations you should be aware of. Business interruption insurance doesn't cover everything, and it might not be enough for your needs.

You have to weigh the pros and cons and decide if it's worth it for your business. Let's look at some of the common exclusions and limitations of business interruption insurance.

COVID-19: The Biggest Exclusion of Business Interruption Insurance

One of the biggest exclusions of business interruption insurance is COVID-19. No carrier would cover the loss of income caused by the government order to close due to the pandemic. 

That's because the policy already excludes viral and bacterial issues that affect your business. So you can't claim that you were forced to close due to a civil or governmental reason.

That clause is meant for situations like this: A fugitive escapes from prison and hides in your neighborhood. The police shut down seven blocks of the area and don't let anyone in or out until they catch him. He holds some hostages and refuses to surrender. 

It takes nine days before he finally gives up. During that time, your business is closed and you lose money. That would be covered by business interruption insurance.

But COVID-19? No way. That would be too much for the carriers to handle. They would go bankrupt or raise their rates sky-high. Insurance agents would lose their jobs or have to charge you ridiculous amounts for your auto insurance.

That's why disastrous outbreaks like COVID-19 aren’t covered by business interruption insurance. It's a nightmare scenario that no one expected or prepared for.

9/11 Changed the Definition and Coverage of Terrorism for Insurance Policies

Another example of how business interruption insurance can be affected by external events is 9/11. When the terrorist attacks happened, President George Bush declared it an act of war

But that created a problem for the insurance policies that covered the World Trade Center. An act of war is automatically excluded from most policies, so the insurers wouldn't have to pay for the damage or the lost income.

But then the government changed its mind and called it an act of terrorism. That's different. Terrorism is not an act of war, so it's not excluded from the policies. 

That means life insurance policies, property insurance policies, and the extra policies that were bought just before the attacks could pay out. That one little change could have made a huge difference.

That's what we deal with in our world now. Ever since 9/11, the insurance industry and the government have created new provisions and regulations for terrorism coverage. There is now a federal program called the Terrorism Risk Insurance Act (TRIA) that provides a backstop for insurers in case of a large-scale terrorist attack.

There are also new options and exclusions for terrorism coverage in the policies, depending on the type and extent of the event. Terrorism coverage didn't exist before, but it does now.

So, here's the bottom line: if you generate income as a business, which hopefully you do, you should have business interruption insurance. It can protect you from losing your income and your business due to a disaster, whether it's natural or man-made. 

But you also need to understand what's covered and what's not, and how the definition and coverage of terrorism can change over time.

How Your Annual Revenue and Actual Loss Sustained Affect Your Business Interruption Coverage

Business interruption insurance covers a range of scenarios that can cause you to lose revenue due to a covered event. But it also has a limit, which is based on your annual revenue. The insurance carrier will ask you how much you make in a year, and your rate will depend on that.

But you have to be accurate when reporting your revenue. If you say you make less than you do, you’ll pay a lower rate, but you’ll also get a lower limit. 

For example, if you say you make $40,000 a year, but you actually make $120,000, you’ll only get $40,000 of business interruption coverage. That’s the max. They won’t pay you more than that. If you try to claim $120,000, they’ll say you only reported $40,000. That’s all you get. That’s very important.

But there’s a way to avoid this problem. You can buy actual loss sustained coverage. This means the insurer will cover whatever you lose, regardless of your annual revenue. 

But if you do that, be ready for them to check your books and verify that you lost as much as you claim. They’ll look at your historical records and compare them to your current situation. So get your QuickBooks ready, because they’ll want to see the records.

Get Tailored Business Interruption Insurance for Your Unique CNY Operation

Imagine the despair of turning away customers, the emptiness of a silent storefront, and the crushing weight of bills mounting with no income coming in. This harsh reality could become yours if disaster strikes and you’re left without business interruption insurance.

On the other hand, picture the strength and confidence that comes with knowing your business is protected. A covered event disrupts your operations, but the bills are paid, your employees are supported, and you have the resources to rebuild. 

Business interruption insurance becomes your silent partner, shouldering the financial burden and allowing you to focus on getting your business back on its feet.

Don’t wait for the storm to hit. Let business interruption insurance be your shield, so you can weather the storm and emerge stronger.

We can help. Click the Get a Quote button below to have one of our business insurance specialists tailor coverage to your specific CNY operation.

Also learn How Mechanical and Electrical Breakdown Insurance Can Safeguard Your CNY Business.

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Daniel J. Middleton

Daniel is an accomplished content creator. He has been working in publishing for almost two decades. Horan Companies hired Daniel as its content manager in November 2022. The agency entrusted its messaging to him. Since then, Daniel has written insurance articles, service and pillar pages, and more. All in an effort to educate CNY readers. He's helping them understand the world of insurance so they can make informed decisions.