Your business is housed in a solid building. You have a sprinkler system. Your property is insured. If something happens to your location, it’s just matter of cleaning up and carrying on, right?
Unfortunately, too many business owners think this is true and fail to have adequate business interruption coverage to pay for their expenses while they are rebuilding and unable to operate, says Nate Bell, CIC, producer at Zito Insurance Agency.
“If your physical space is damaged by a Covered Cause of Loss, such as a fire or wind or hail, business interruption insurance will pay your lost net income, along with ongoing expenses, until you can get up and running again,” he says.
Smart Business spoke with Bell about how business interruption coverage could make the difference between a full recovery and going out of business.
What is business interruption coverage?
Business interruption coverage is insurance that replaces business income lost as a result of a covered claim that causes physical damage to your property that prohibits you from operating your business from your physical location.
For the time that you are unable to conduct business, it provides income to cover ongoing expenses such as payroll and taxes. It can also cover extra expenses that help you get up and running as quickly as possible, costs that you otherwise wouldn’t have incurred. For example, while your property insurance would cover the replacement costs of building and equipment damaged, business interruption insurance can cover the additional expense for leasing building space down the road to get up and running as quickly as possible.
However, most policies do not cover losses due to a pandemic, because it isn’t included as ‘covered cause of loss’ in a standard property policy. Some policies have specific exclusions for losses due to a virus. Unfortunately many insureds were hopeful that Business Interruption would help offset losses due to government shutdown of businesses, but COVID-19 has made more business owners aware of what can happen if they can no longer use their facility, highlighting how much business interruption insurance is needed.
How can owners determine how much coverage they need?
Your trusted adviser can walk you through the process. Using an industry-specific BI spreadsheet, you determine what you would do if your business had to shut down and what funds you would need to remain viable.
There are several factors to consider. A business in the service industry may be able to operate from home, so it doesn’t have as much exposure and may be able to continue to operate if its physical space is unusable. A manufacturer, requires a physical location to continue to operate, and there would need to be more coverage than other industries.
Another variable is whether you own the building. If so, you may be more dependent on it than if you lease, depending on your lease agreement. You can typically find another building to lease, but if you own, that building is critical to your operations.
A business owner can opt for coverage that includes payroll expenses, allowing it to continue paying employees while repairs are made to the building. Depending on your industry, you may choose to forgo this, letting your employees seek other jobs, but most businesses choose this coverage so they don’t lose good employees to competitors.
It is crucial to ensure you have adequate coverage limits, so don’t guess. Sit down with an agent and go over a business interruption worksheet to identify the level of coverage you need. Then review your needs annually, if not more often, to ensure your levels of coverage remain adequate.
What would you say to owners who think they aren’t at risk?
Many companies, even those with covered losses, have gone out of business because their limits weren’t adequate to recover. It always takes longer than estimated to rebuild after a loss. If you think it will take 12 months, it will typically take 16 to 18.
Too many owners think, ‘It’s never going to happen to me. I’m never going to lose the building and be shut down for months.’ But it does happen, and your expenses aren’t going away because you aren’t operating — and if that period goes on longer than anticipated, you could be out of business.
Insights Business Insurance is brought to you by Zito Insurance Agency