Business Interruption Insurance

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What is Business Interruption Insurance?

Business Interruption Insurance is a form of business insurance to protect companies against the loss of income after events (disasters) that temporarily interrupt business operations. The coverage of this type of insurance covers the profits that would have been earned should the event not have taken place, while a regular commercial property insurance only covers the physical replacement damage to the business. Business interruption insurance helps companies to avoid bankruptcy caused by unpredictable loss of profits.

Typically this type of coverage is not sold as a stand-alone insurance policy, but as an addition to a business property insurance policy or comprehensive package policy.

Synonyms

Business interruption insurance is also known as:

• Business income protection
• Profit protection
• Out of business coverage
• Use and occupancy coverage
• Earnings insurance
• Consequential loss insurance
• Loss of profits coverage

History of Business Interruption Insurance

The first form of business interruption insurance can be found in France around 1860 with the 'Chomage' (which means standing still or idle as in a factory or a stoppage or cessation of labor). The first real business interruption insurance was developed in the United Kingdom.

Causes of business interruption

A company may face a loss because of unpredictable events such a fire, natural disaster, theft, vandalism or other insurable causes. It is important to note that this insurance is against the consequences of such perils, i.e. the interruption of profits generation.

Business interruption insurance is an additional policy that can be included in an existing one and it is applicable to all kind of companies. Business interruption insurance could be also very important in case of large investments for a company.

Conditions Business Interruption Insurance. Terms

• An insured company receives repayments only if its loss is a consequence of a covered event in the policy.
• If there is loss of production capacity without a loss of incomes, business interruption policy may not pay.
• Premiums paid by companies are normally tax deductible as ordinary expenses.
• Premiums are usually based on the past financial records of the business because it can often be difficult to predict the future profitability of a firm. In other words, the policy price is related to the risk of damages of a business: the more it is at risk, the more it will pay. Other factors which could affect the cost of a business interruption insurance could be location and size of business.
• The amount of reimbursements, in part, is based on the potential loss of earnings plus expenses originated by the interruption of companies’ activities.
• Usually the policy works from the shutdown moment until a company returns to its pre-loss state.
• The limits of a business interruption policy depends on the business’ needs. Generally, business interruption insurances have a pre-determined period after which one cannot make a claim.
• In normal business interruption insurance certain income categories, such as interest on investments or profits on the sale of assets are normally not included..

Types of Business Interruption Insurance. Categories

There are various types of business interruption coverage available. Generally, business interruption insurance may cover:

• Lost profits because of the shutdown.
• Operating expenses, such as electricity, incurred by businesses when it is stopped.
• Some policies cover costs associated to set up and run a temporary location while the original one is being repaired or rebuilt.
• Some policies also cover employees' salaries.

• Some policies may also cover special disasters, such as hacker attacks for Internet-based companies.

• In order to recover extra-expenses, there must be a specific extra expense provision in the business interruption policy.

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