Business Interruption Insurance

by Karen Murphy, MostChoice.com

Although not absolutely essential, business interruption insurance will add greatly to the security of your business.

Imagine that you are hit with a disaster such as a fire or hurricane. In the event your business is suspended, your ability to generate cash will be severely hindered. Not only will you lose profits, you will lose the ability to cover ongoing expenses such as payroll, taxes, loan payments and utilities. Consider, too, the expenses associated with recovering those losses or operating your business in another location.

Business interruption insurance is your ticket to keeping your business running in the unfortunate event that your operations are suspended due to fires, lightening, hurricanes, tornadoes or other disasters. It will reimburse you for the lost profits and the fixed expenses of your business in the event of an interruption.

Coverage

Business interruption insurance covers three primary areas: property; business income; and major operating expenses.

Coverage is generally provided for the time it takes to rebuild, repair or replace the damaged property with reasonable speed and similar quality. It usually begins with the date of occurrence and can extend up to 12 months after a catastrophe occurs.

Not all business interruptions are covered in all plans. For instance, interruption resulting from flood and earthquake damage is rarely covered. Also, some plans don't become active until 48 to 72 hours after you report the incident, and they may not cover shutdowns from a civil authority. For this reason, you may have to purchase additional coverage in relation to your needs, or modify existing policies to address specific situations.

When determining coverage, be sure to consider the costs of leasing computer equipment, leases on property, automobiles, computers, copy machines and fax machines, as well as the physical facility itself. You may also consider interruptions that result from damages outside of your business. Interruption from power, water, gas and telephone companies as well as from the loss of third-party income or supplies may be covered by contingent business interruption insurance.

Policies

For most small businesses, business interruption insurance is typically one component -- a rider or endorsement -- of a larger business insurance policy. Oftentimes, it is already built into a company's standard business owner's insurance policy. These type of policies usually include coverage for up to 12 months after a disaster or insured incident and generally cover retail, office or small-business services with gross revenues of $3 million or less.

Whether you own a large or small business, you should ensure that your policy includes direct information about your business income, projected future income and the projected expenses that your business will incur on equipment, payroll and securing a temporary operating facility.

Premiums

Premiums can vary widely from client to client, but coverage limits are generally 20 percent of the value of the business. If you don't want to purchase by percentage of income, you can purchase by dollar limits of coverage. However, if you own a small business, it may be more beneficial to buy percentage limits, because income in a small business tends to fluctuate.

Determining Your Needs

Knowing your risks is the best way to determine the type of insurance plan that is right for you. Be sure to take a good look at all the business interruptions your business might face, as well as how your profitable seasons coincide with increased chances of natural disasters, such as hurricanes or tornadoes.

Decide whether or not your company can afford the loss of business and the expense of reestablishing your business in the event of a disaster.

Remember that you will likely recover from a disaster more quickly when you plan in advance by purchasing the right insurance and when you develop and maintain a strong recovery plan.

Business interruption insurance can save your company from a serious or complete setback. It is for this reason that purchasing interruption insurance in varying amounts and under varying circumstances is a good idea for almost all businesses.