Business Interruption Insurance: Why Every Business Owner Needs It
I’ve been a business owner for the last six years, and it pains me to say this, but I’ve yet to take adequate steps for protecting my income in the event of a business interruption. The worst part of it: there’s really no excuse. Business interruption insurance exists to help out those of us entirely dependent on ourselves and our clients. While employees have other fallbacks they can depend on, you are in a unique situation working for yourself.
For starters, if you get up in the morning and decide you don’t want to work, then you just have to do without the revenue (unless you have a reliable passive income stream established or employees to help shoulder the burden). Especially in the beginning stages of your business, you have to work every day just to eat. At least that’s what my experience was. Some of you may know of a better way. Regardless, it pays to have protection against business interruption.
And protection is exactly what the typical policy gives you. There are generally five key areas that it covers.
Profits: By analyzing financial statements from prior months, your insurance company is able to reach a fair amount of coverage should something happen to impede your ability to generate revenue and profits.
Fixed Costs: When your business does take a hiatus, that doesn’t necessarily mean that the expenses will as well. You may have a lease that you have to continue paying on, for instance. For any operating expenses and other costs still being incurred by the property, business interruption insurance can make sure you continue to be paid. The determination is made based on historical costs.
Temp Location: When a restaurant burned down in the town where I live, the business owner was able to secure a temporary location and continue to operate in spite of the rebuilding that was under way. His insurance paid the extra expenses for moving to, and operating from, this location.
Extra Expenses: If there are any costs that don’t fall under the Fixed Cost banner, but a reasonable case can be made for the expenditure, then most policies will offer reimbursement. Typically, the extra expenses will be necessary to continue operation of the business during repairs.
Government-Mandated Closure: It doesn’t happen often, but there is a chance that you may have to shut down your business on account of an ingress / egress order from the government. Examples: when a town issues a curfew or closes the street where you do business, you are eligible to be compensated for lost revenue under most business interruption insurance policies.
These five areas are in effect for the entirety of the business interruption period as determined by your policy. Most of the time, this means you start getting compensation on the date of the closure event. It will last while repairs are being made until your business is completely restored to its condition prior to the event.
Last but not least, your business may occasionally be interrupted due to the closure of a supplier. When this occurs — usually due to a hurricane or other natural disaster — you are unable to operate in the same manner as you would under normal circumstances even though the disaster didn’t happen to you personally. If you face this situation, it’s important to have purchased contingent business interruption insurance. This will help defray some of the loss.
Business interruption insurance is just one of the many things you have to remember as a business owner, and it does not matter whether you’re a small business with a few employees, a large company, or a sole proprietor. Life can happen in unpredictable ways — ways that aren’t always beneficial. If you earn an income, you owe it to yourself to protect that income when the curves get tossed your way.