What is Business Interruption Insurance?
Business interruption insurance is coverage that replaces business income lost due to a disaster, such as a fire or a natural disaster. It is not sold as a separate policy but is typically added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider.
Key points:
- Purpose: Business interruption insurance replaces income lost when business operations are halted due to direct physical loss or damage, like a fire or natural disaster.
- Coverage: This insurance typically includes business income coverage, extra expense coverage, contingent business interruption coverage, and civil authority coverage.
- Expenses Covered: It covers operating expenses, relocation costs if necessary, payroll, taxes, and loan payments.
- Civil Authority: In rare cases, it can apply if a civil authority shuts down a business due to physical damage to a nearby business, causing a loss for the affected firm.
- Exclusions: Standard business interruption insurance does not cover closures due to pandemics. Even some all-risk insurance plans exclude coverage for losses caused by viruses or bacteria.
Understanding Business Interruption Insurance
The premiums for business interruption insurance, or the additional cost of its inclusion, can be deducted as regular business expenses. This specific insurance type disburses payments solely if the cause of income loss aligns with the covered events in the primary property/casualty policy. Payments are typically calculated based on the business’s historical financial records.
The coverage provided by business interruption insurance remains in effect until the conclusion of the interruption period, as stipulated within the insurance policy. Standard policies last 30 days, but opting for an endorsement can prolong this coverage to 360 days.
In most cases, these policies define the duration from the onset of the covered event until the damaged property is fully restored to its pre-disaster state as the interruption period. Additionally, a waiting period of 48 to 72 hours might also be applicable.
Types of Business Interruption Coverage
To better understand the specifics of what’s covered or excluded in business interruption insurance, it’s crucial to comprehend the various forms of coverage available. Understanding these distinctions is key because different types of coverage may encompass or exclude specific items in a claim. Below are the primary categories of business interruption coverage.
Business Income Coverage
This coverage aids in replacing lost income and managing ongoing expenses if your business faces temporary closure due to a covered loss. It encompasses compensating for missed profits, payroll, rent, taxes, and other operational costs detailed below.
Extra Expense Coverage
This assists in bearing the additional costs your company might incur to prevent or minimise a shutdown. It includes expenses like renting temporary office space or equipment, paying overtime to non-exempt staff, or covering transportation or relocation costs temporarily.
Contingent Business Interruption Coverage
This coverage shields your company from losses arising due to disruptions in the operations of a supplier or another business partner crucial to your company. For instance, if a fire halts your supplier’s deliveries to your company, this coverage might compensate for your lost income.
Civil Authority Coverage
This protection guards your firm against damages resulting from government-mandated closures or restrictions hindering its operations. For example, if your business must close due to a mandatory evacuation or a locally mandated curfew, civil authority coverage may compensate for the income lost during this period.
Consider how each expense might relate specifically to a certain coverage type or could be included only if that particular coverage is selected.
Coverage Items
Business interruption insurance often encompasses the following aspects.
Profits
Reimbursement based on previous months’ performance, compensating for foregone profits due to the event’s occurrence.
Fixed costs
Encompassing operational expenses and other accrued business costs.
Temporary location
Coverage for expenses linked to relocating and operating from a temporary business site.
Commission and training costs
Addressing the need to replace equipment and provide training for personnel post-event, with potential coverage under the insurance.
Extra expenses
Reimbursement for reasonable additional expenses, surpassing fixed costs, facilitating business operations during the recovery phase.
Civil authority ingress/egress
Coverage for financial losses due to government-mandated closures, such as curfews or street closures resulting from a covered event.
Employee wages
Essential coverage to sustain payroll when operations cease, preventing employee loss during shutdowns.
Taxes
Coverage ensures timely tax payments to evade penalties, acknowledging the obligation to pay taxes despite the disaster.
Loan payments
Assistance in meeting regular loan obligations even during income-generating interruptions.
Exclusions
Business interruption insurance can be comprehensive, but there are some parts that a business insurer will not consider valid in such a policy:
- Damage to specific items, like glass resulting from a covered event or loss.
- Flood or earthquake damage, typically requiring a separate policy for coverage (eg force majeure/acts of God).
- Unlisted income not documented in your business financial records.
- Utility expenses
- Instances related to pandemics, viruses, or communicable diseases.
Please be aware that the insurer is solely responsible for payment if the insured has genuinely suffered a loss due to the interruption. The reimbursement received by the business will not surpass the limit specified within the policy.
Business Interruption Insurance and Pandemics
Unsurprisingly, the scope of coverage provided by business interruption insurance has faced considerable scrutiny amid the COVID-19 outbreak and subsequent business closures and restrictions.
Australia took note of how the pandemic affected business interruption (BI) claims. Two test cases were presented before the High Court and Federal Court of Australia in 2021. The High Court case concerned an NSW Court of Appeal ruling against insurers who sought special leave for appeal, citing exclusions under the Quarantine Act. The Federal Court case covered six appeals.
The Insurance Council of Australia reported that many BI claims related to the pandemic were filed with references to the Quarantine Act. However, that Act was repealed in 2016 and replaced by the Biosecurity Act 2015 (Cth), which considers COVID19 as a communicable disease – and therefore not liable for business interruption insurance.
The Federal Court of Australia’s Full Court also denied three special leave applications related to the test cases in February 2022, which the High Court later upheld in October 2022. The decisions enabled AFCA and ASIC to have more concrete guidance in handling BI claims, including those outside AFCA purview.
As of March 2024, the AFCA confirmed there were 418 COVID19-related BI claims filed since the crisis broke out in early 2020. The agency tallied 257 claims as “closed” with 50 still under investigation and awaiting resolutions. However, resolutions on 110 claims were put on-hold because the Federal Court is still hearing class-action suits which may be relevant to those claims.
FAQs
What is the price of business interruption insurance?
The pricing of business interruption insurance fluctuates based on multiple elements, encompassing your company’s size, industry, and preferred coverage extents. Factors like your business’ location, revenue, and past claims can also impact the insurance cost. The annual expense for business interruption insurance ranges from a few hundred to several thousand dollars. Nevertheless, the precise cost is contingent on your business’ individual characteristics and the particular coverage choices you opt for.
What events prompt a business interruption insurance claim?
Business interruption coverage generally triggers solely when there’s direct physical property damage due to a covered event. Financial claims can only be made if this event results in harm to your physical premises.
Are there limits to business interruption insurance claims?
The coverage for business interruption is frequently capped, determined by a specific level of activity within a designated period. For instance, certain policies might confine business interruption coverage to a 12-month financial cycle. Moreover, there might be restrictions on the eligible expenses for claims or the categories of lost revenue that qualify for claims.
Conclusion
Business interruption insurance may provide a degree of support for rather inconvenienced business operators. However, it’s not a panacea and a proper reconstruction of the facts behind the interruption can help the insurer activate the policy and issue adequate compensation.
DISCLAIMER: This article is for informational purposes only and does not replace official business insurance advice. AVANTE PARTNERS is not an insurance service, and has no relationships with any business insurer or insurance industry organisation mentioned. Please consult your insurer.
