Business Interruption Insurance
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What is Business Interruption Insurance?
So the business interruption policy will compensate if the company is forced to close or scale down its operations and suffers any income loss. The policy provides coverage for the business interruption period as defined by the insurer in the policy document.
What are the Types of Business Interruption Insurance?
1. Loss of Gross Profit Cover : This is the most common type of business interruption coverage. It provides compensation for the loss of profits due to a reduction in sales and any increase in the cost of working after the disaster.
The definition of gross profit in relation to insurance is different from that of accounting. Certain expenses will not be incurred by the business after the disaster strikes. These are typically variable costs that change in direct proportion to sales turnover. So if sales fall by 25%, there is an equivalent 25% reduction in such costs. They are also known as uninsured working expenses (UWE).
The objective of UWE is to not insure costs that will cease after the disaster occurs. By excluding such costs, insurance coverage can be optimized for the policyholder who benefits by paying a lesser premium.
The gross profit cover is primarily meant for businesses with high variable costs.
2. Loss of Gross Revenue Cover : Businesses with a lower proportion of variable costs can opt for a loss of gross revenue cover for any business interruption.
This policy covers the reduction in sales and any increase in the cost of working due to a disaster. This method does not entail the difficulties of calculating the gross profit. It is sufficient to know the sales turnover to provide accurate insurance coverage.
Gross revenue cover is more suitable for service-based businesses that have fewer variable costs. But it is advisable to study the business closely before buying business revenue insurance.
3. Increased Cost of Working Cover : The increased cost of working cover compensates the business for any additional expenses that arise after the disaster. This cover is included in both the gross profit and the gross revenue loss policies with an upper limit. It can also be bought as a standalone policy with no upper limits.
This type of interruption insurance is ideal for businesses that are highly resilient and just need some extra cash to bounce back after a disaster.
What is Covered Under Business Interruption Insurance?
Business Interruption Insurance policies cover the following risk factors.
- Loss of Profits: Based on past performance, the policy will compensate the business for the profits that would have been earned if the insured event had not occurred
- Fixed Costs: The policy also pays for the fixed costs of the business, such as the operating expenses, which have to be incurred at all times
- Additional Costs: The policy will also provide support for additional expenses beyond the fixed costs to keep the business running until it recovers
- Damaged Property Loss: Any expense incurred to repair or replace the equipment, plant & machinery damaged during the event will be covered by business income insurance
- Relocation Expenses: If the existing physical location of the business is rendered useless, the policy covers the cost of shifting and working from a new temporary location
- Commission & Training Costs: The costs incurred to replace the machinery and retrain the employees will be covered
- Loan Payments: A business interruption policy helps the company to pay the loan installments even if there is no income
- Employee Wages: The policy also covers employees’ wages to help the business retain its employees during the shutdown
- Taxes: Paying taxes on time is a statutory liability and cannot be avoided. Tax coverage helps the business to pay its taxes during a crisis and avoid penalties.
What is not covered under Business Interruption Insurance?
Business Interruption Insurance does not cover the following:
- Undocumented income that is not reported in the financial records of the business shall be excluded
- The utility bills of the business will not be covered unless it is shifted to a temporary location
- Losses due to events like floods, earthquakes, diseases, and pandemics will not be covered.
- Interruption insurance only covers complete interruption of business. Partial interruptions & closures are not covered
- Business interruption due to temporary power outages is excluded
How Much Business Interruption Insurance Do I Need?
Time required for the business to recover
Safety and security features in the building
Time required to shift to a temporary location
Value of the plant & machinery, and equipment
Employee wages and daily operating expenses
You can consult the experts at Prominent Insurance Brokers to structure the right business income insurance coverage.
How Much Does Business Interruption Insurance Cost?
Nature and size of the business
Industry type
Business locations
Amount of insurance coverage
Claims history of the business
Frequently Asked Questions on Business Interruption Insurance
Business Interruption Insurance protects against loss of business income due to disasters, accidents, and other unforeseen events that may lead to the closure of the business.
Business interruption insurance gets triggered when the insured event causes physical damage to the business, which results in the closure of business activities.
The business interruption coverage lasts till the end of the business interruption period as laid out in the policy. This is generally the period from the beginning of the insured event till the damaged property is brought to its original condition.
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Disclaimer: The Business interruption insurance or plan may have limitations, exclusions, and other terms and conditions that may affect coverage. It is important to carefully review the policy wording before making any decision.