What is business interruption insurance?

Business interruption insurance covers the business income that would have been earned or incurred if a suspension of regular business had not occurred. The business interruption insurance also covers any normal operating expenses that must continue during the suspension of the business. This may include but is not limited to: rent on the place of business, utilities, shipping fees etc. Business interruption insurance is used to pay the actual loss of business income sustained by the insured because of necessary suspension of the insured's operation. This is done during the period of restoration following a loss. The suspension must result from direct physical loss or damage to real or personal property. Coverage is provided against the same causes of loss covered under the insured's property policy. Under certain conditions, the policy also provides an extension of coverage for newly acquired property.

The insured's operations must be the business activities of the insured, which occur at the location listed in the policy. The period of restoration is the period beginning at the date of direct loss, and ending when the damaged or destroyed property could have been restored. There are basically 6 key business interruption coverage's. These are:

1. Rental income or loss of rents. This is one of the simplest and most basic forms of income insurance. If one is a landlord of an apartment building, a mall, an office building, storage facility, or any other type of structure that is rented or leased, and is dependent on the rental income than this type of loss should be insured. This type of insurance is especially helpful if this rental income is needed to pay property taxes, mortgage payments, insurance, maintenance, and other expenses. In addition the insurance can help replace profit. A potential buyer of this insurance needs to make sure to buy enough insurance to cover expenses and profits during the entire period of rebuilding.
2. Leasehold interest-In this situation, an insurance holder is leasing a building or space and has negotiated a very favorable lease. The lease is then terminated by fire or other insured peril. To find a comparable property would more than the current lease. The holder of business interruption insurance can insure against this added potential expense.
3. Business income-Coverage can be designed to replace for loss of income and payment of continuing expenses during the time of restoration. The property must be damaged by a covered peril to trigger this coverage. The insured uses all reasonable means to get back into business as soon as possible, even if at a reduced capacity. Expenses incurred in attempting to minimize the loss by resuming operations are payable under the policy as long as they do not exceed the amount that the actual loss was reduced.
4. Extra Expenses-As businesses try to quickly regain footing and establish normal operations there may be extra expenses. For example if a temporary location must be opened to provide access for customers. This is done to help insure again the potential loss of customers.
5. Machinery and Equipment Breakdown-Most property policies do not provide protection from many losses caused by the breakdown of machinery or equipment. These types of losses can also cause a catastrophic interruption in business. In the past this coverage was called boiler and machinery. With the added technology of telecommunications, computers, and specialized production equipment, much has been added to the old boiler policies. Business income, extra expense, and consequential coverage can and should be added to this coverage. This is usually an inexpensive but important option.
6. Contingent Business interruption and extra expense- This coverage applies to losses resulting from a loss to a property not owned, operated, or controlled by the insured. This is especially needed for businesses dependent on outside vendors.

In today's fast changing business environment the smart business owner tries to prepare for every possible crises and respond quickly to keep his business intact. By asking the right "what if" questions you can plan solutions and respond more effectively if you are confronted with a real-life interruption of your business.

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