Business Interruption

Disasters like hurricanes, fires, and floods can cause massive devastation and substantial property damage. However, the damage they do to small businesses can extend much further than the physical destruction. Small businesses need to stay open every day possible. When they are shut down, it can throw a company into bankruptcy. 

Business interruption insurance covers any loss of income that occurs because a disaster or other peril shuts down your business. A business's ability to get back on its feet after a disaster could be crippled by the time it spends being shut down. Typical property damage insurance may cover the facilities and inventory destroyed by a disaster, but will not cover the income lost.

However, even if there is sufficient property damage insurance to cover the damage to the business's building and infrastructure, it could take weeks or months to make a structure safe for employees and customers to enter again. Damaged equipment may take long periods of time to replace, especially if the equipment was custom-made for your business, and especially if the equipment manufacturer suffered losses in the same disaster. Inventory must often be restocked — if there's nothing to sell, there's no point to being in business. Even the best financial planning may not help a company destroyed by a disaster.

The income can be critical to the business's survival. Many businesses rely on continuing income, and the income lost after a disaster can be more damaging that the disaster itself.

How are Business Interruption Losses Calculated?

Business interruption claims frequently lead to disputes over the precise value of the damages. This is because it can be difficult to accurately calculate a company’s interruption related losses. Under Florida law, insurance companies have a duty to act in good faith. Unfortunately, insurance companies sometimes take advantage of the murkiness of lost income calculations and offer impacted businesses unfair settlements. On the surface, the calculation of business interruption losses is rather simple. The value of the damages should equal the amount of income that was lost due to interruption caused by property damage. This can be determined by looking at the time the business was closed and the amount of sales that would have otherwise occurred during that period. However, this clearly requires using projected future income forecasts. Disputes can arise over what constitutes a fair projection of lost business income. Affected businesses must begin assembling evidence that supports their projections as soon as possible after property damage is sustained. You can be sure that the insurance company will take a very critical look at any projected income estimates.

Business interruption insurance (BII) is very common--and very commonly misunderstood. In short, standard BII is designed to cover the loss of income incurred if normal business operations are disrupted or halted by damage to property. Rodman explains it this way: "Business interruption insurance is designed to cover actual loss of income due to loss of physical property. It is designed for those situations where the loss at the site directly triggers a loss of income to the business." In other words, if your business' location is critical to your ability to produce revenue, then business interruption insurance is key. Businesses most affected by this kind of loss include manufacturing, wholesale, and retail businesses. Business less affected would include many service businesses--those companies that would experience little loss of income due to facility damage.

There are many types of contingencies and clauses that can be included in BII. Many businesses affected by the WTC attacks, for example, suffered so-called "business income" losses. This could include losses from interruption of utility services, from the inability of customers or vendors to reach you, or because a critical supplier or customer has suffered significant damage. Are these losses covered? It depends. "Many business owners may not realize that a policy covering property damage loss ("direct loss") will not cover a business income loss ("indirect or consequential loss") unless the policy is specifically endorsed to provide this coverage," explains Wall. "Similarly, coverage for the other types of losses... is also generally not automatic but has to be negotiated and bought, sometimes at an additional premium cost."

Walls says that a few of these other types of losses include:

  • "Contingent Business Interruption" coverage -- losses suffered from loss/damage to property that prevents a supplier from supplying goods and/or services to you, or that prevents customers from accepting goods and/or services from you. "For example, businesses that sold mementos to WTC visitors, barber shops and delis that served the 50,000 people who worked at the WTC, all would lose a significant portion of their revenues and profits from the wiping out of the WTC," says Wall.

  • "Services Interruption/Off Premises Power" coverage -- losses suffered from loss/damage to the property of any service provider including electrical equipment & systems, fuel, water, gas, feedstock, pulp, liquid gases, sewage, steam, telephone, fiber optic cable, telecommunications, heating, refrigeration and/or air conditioning systems, or utility plants. For example, "this could include spoiled food at restaurants and supermarkets from interruption of power, telemarketers unable to communicate because of the disruption of the phone lines," says Wall.

  • "Interruption by Civil or Military Authority" coverage: losses suffered when, as a result of loss, damage, or other event, access to your property is restricted by order or action of civil or military authority. "This would include loss suffered by residents and businesses abutting the WTC area where access was prevented for a week or more by the FBI and New York City Police."

  • "Ingress/Egress" coverage -- losses suffered when, as a result of loss, damage or other event, entry to or exit from your property is impaired. This can include hotel and motel room cancellations, or the cancellation of Broadway shows due to of the closure of the bridges, tunnels and airports that people need to reach New York City.

8. Extra Expense Insurance

Another thing that basic business interruption insurance does not cover are the additionalexpenses--those beyond actual loss of income--that you may incur if you have to move your business as a result of property damage. For example, if your office burns down, you may need to rent substitute space (perhaps at a greater cost), buy or rent computer & other business equipment, install phone lines, set up security measures, etc. These kinds of expenses generally fall under "extra expense insurance." Frequently, business interruption insurance and extra expense insurance are rolled into one, and called something like, "business income extra expense." Be sure to ask your agent or broker if both are specifically included in your policy, and how much coverage of each your business needs.