Basics of Business Interruption Insurance in 2020

Business Interruption Insurance has become increasingly important for business owners this year. Forced to navigate so much uncertainty, the people behind commercial operations have faced their fair share of adversity. There has been an unprecedented amount of disruptions. Those have had ripple effects impacting businesses, both big and small. It is vital for professionals to asses their risk exposure and their property insurance policies in order to prepare for and avoid potential losses.

Business Interruption Insurance is insurance coverage that replaces business income lost in the event of an interruption at your place of business. The interruption can be an event that ranges from a fire, flood, or natural disaster. Particularly after a major disaster, it can take more time than some people realize to re-open their doors for business.

Sometimes referred to as Loss of Profit Insurance (LOP) or Loss of Income (LOI) Insurance. Business Interruption Insurance comes into effect after a claim is made based on a blockage of the normal use of your assets, which results in significant financial consequences. The insurance policy allows your company to offset the impact of lower revenue and cover the fixed charges, which might often manifest in a long downturn. Ultimately, Business Interruption Insurance will help prevent your company from incurring extraordinary costs from the consequential loss.

It is important to know that Business Interruption Insurance always comes as an extension of your Property All Risks (PAR) Insurance. This means that the basic coverage that would kick in must be accompanied by a damage/loss to your business premises. Therefore activating the PAR claim.

There are some noteworthy exceptions to this. For example, if you cannot access your place of business because of an incident (e.g., disaster, shutdown, etc.) nearby your business premises, Business Insurance Protection can be used.

What is covered under Business Interruption Insurance?

Business Interruption Insurance covers:

  • Profits/Income:  Your business income or your profits, that should have been earned without this Business Interruption
  • Rent/Mortgage/Lease Payments:  Your rent (or mortgage/lease payments) that you are still liable to pay during the period of interruption or your loss of rental income if you are the owner of the premises
  • Employee Wages: Wages and salaries for the period of interruption
  • Loan payments: Your business can continue to make your monthly loan payments when you do not have any revenue coming in.
  • Taxes: Even when a disaster strikes, business are still required to pay taxes. Tax coverage helps your business make timely payments and prevent penalties.
  • Civil authority mandates a closure: Your business is protected from interruptions as a result of a government-mandated closure of business premises in the event of physical damage that causes financial loss.
  • Additional expenditures

There are some free extensions available, depending on your insurer, including:

  • Closure by public authority (generally in case of sanitary issues)
  • Prevention of access (in case of problems within the vicinity)
  • Accidental shut down of public utilities

Deductible for Loss of Profit

Like most insurance policies, there is a deductible to your Business Interruption Insurance coverage. The deductible comes in the form of a time greater than 48 hours…meaning that your business needs to be impacted for more than 2 consecutive days to receive the benefits under your policy. Additionally, the loss of income or profit will be based on your latest financial statements.

Business Interruption Insurance & Pandemics

One issue on many business owners’ minds is whether their Business Interruption Insurance covers the effects of the COVID-19 outbreak and business shutdowns that resulted. Unfortunately, for most policy holders, Business Interruption Insurance does not cover the coronavirus pandemic. Standard practice under Business Interruption Insurance is that, in order to receive benefits, the impact on your business must result from physical loss or damage or nearby physical damage to a neighboring business (and the government closes all business as a result).

Period of Restoration

Under the protection of a Business Interruption policy, you as the insured are covered for the loss of business income during the period of restoration, which is generally considered to be the length of time required to rebuild and/or repair damaged or destroyed property. The period of restoration initiates when the physical damage or loss occurs, and it ends when the property should be repaired or replaced within a reasonable time and the business is then ready for normal activity to resume.

As long as the physical damage or loss happens during the policy period, the Business Interruption Insurance policy will provide coverage for the period of restoration.

Contact Red Asia Insurance today to learn more about Business Interruption Insurance and how we can help best protect your business.

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