No one wants to consider the possibility of their business temporarily closing its doors. However, disasters like floods and fires can force you to close your physical space. The COVID-19 pandemic, for example, has led businesses throughout the world to temporarily (some permanently) close their doors, whether due to local ordinances or their own desire to help slow the spread of the virus through their communities.
Business interruption insurance is meant to protect small businesses in cases like these. Does your current insurance policy cover business interruption? Do you know what’s covered under these policies, and what’s not? This short guide will help you understand everything you need to know about business interruption insurance. Let’s get started.
What is business interruption insurance?
Business interruption insurance is a kind of insurance that, as the name states, covers interruption to your business’ services. While short-term interruptions like power outages or scaled-back operations are not covered, interruption due to the following events may be:
- Property damage due to extreme weather
- Property damage due to falling objects
- Theft of essential equipment or merchandise
- Government lockdowns and mandatory curfews
Business interruption insurance helps to cover lost revenue and expenses while your business relocates, conducts repairs, or temporarily ceases all operation. These policies help your business weather the storm so that a temporary interruption in operation doesn’t become a permanent closure.
What does business interruption insurance cover?
To understand your business interruption insurance policy, it’s important that you speak to your individual insurer. However, policies are intended to help you cover costs that you cannot meet while your operations cease, and then to help you reopen.
Depending on your policy limits and the specifics of your terms, your insurance may cover full or partial payments on:
- Your business’ rent and lease– If you’re a carpenter and your workspace floods, limiting your ability to conduct your work, your policy may help cover your rent until you’re able to.
- Relocation costs – If you’re a home decorator whose studio is damaged by a construction accident, your policy may
- Payroll – If you’re a nail salon owner whose salon must close due to a government lockdown, your policy may help cover your employees’ wages until you reopen.
- Payments on business or auto loans – If your new personal training studio is closed due to a collapsed roof, your insurance may help you cover the loans you took out for your work vehicle (and startup costs).
- Tax payments – If your photography studio is closed for a month due to structural damage, limiting your ability to conduct photo shoots and collect payments, your insurance may help you with your business tax payments.
Your business interruption insurance is meant to cover the costs to your business during periods of temporary closure. However, there is also damage it will not cover.
What doesn't business interruption insurance cover?
While business interruption insurance can help you cover many of the costs associated with temporary closure and relocation, it’s important to note that it leaves out the costs of damage and repairs. Let’s look at some examples:
If you’re the carpenter whose workspace floods, your specialized equipment may be damaged in the process. Your business interruption insurance does not cover the cost of damage to your equipment.
Likewise, if you’re the home decorator who owns their own studio (and there’s a construction accident), your business interruption insurance will not cover the cost of the property repair.
If you’re a window installer whose work vehicle is damaged by a falling tree, interrupting your ability to serve your clients, your business interruption insurance would not cover your vehicle repair or replacement.
In short, for damage to your business assets including your equipment, your vehicle, or your office (if you own it), you’ll need another kind of insurance. You may want to consider commercial property insurance and auto insurance for damage and loss-of-use related to your business assets.
Business interruption terms
How long does your business need to close before your insurance kicks in? What else should you know about its terms and limits?
To understand your business interruption insurance, you’ll need to understand the following terminology:
Your waiting period is the amount of time you must wait for your interruption insurance to take effect. This may be 48-72 hours.
Your restoration period is the maximum length of time your business interruption insurance will help you cover costs related to closure. A typical restoration period may be 12 months, but this depends on your policy.
Your policy limit is the maximum amount your insurer will pay out due to interrupted services.
Your deductible is the amount you must pay out-of-pocket before your insurer begins payment.
Let’s take a look at an example.
You’re a music teacher and the pipes burst in the studio you rent, damaging your drum kit and preventing you from giving lessons, and the total cost of loss wages and relocation over the course of three weeks is around $10,000. You have a $1 million policy limit and a $5,000 deductible, a 48-hour waiting period, and a 1-year restoration period.
- $10,000 is covered by your business interruption insurance, so long as that number reflects your loss after the 48-hour waiting period.
- You must pay a $5,000 deductible before your insurer pays out the additional $5,000.
- The cost of a new drum kit is not covered by this insurance (but it may be covered by your commercial property insurance).
- Since the business interruption is only two weeks, you are well within your restoration period.
Protect your business from other obstacles
Natural disasters and government shutdowns aren’t the only events that can put you temporarily out of business. In addition to business interruption insurance, most businesses need general liability insurance and professional liability insurance to protect them against client and third-party claims of property damage, bodily injury, and professional mistakes.
Getting liability insurance with Thimble takes less than 60 seconds. Download the Thimble app or click “get a quote.” When you enter your ZIP code, crew size, and a few details about your business, you’ll receive a quote right away. Purchase with a click, and your Certificate of Insurance will be ready for you instantly.
While business interruption insurance is meant to help you when your operations stop, Thimble is here to mitigate the chance that claims of bodily injury, third-party property damage, and professional negligence hinder your business.
Managing your risk with business interruption insurance
Every small business takes on risks when opening. However, your business is vital not just to you, but also to your community. To make sure you can survive the obstacles that come your way:
- Consider business interruption insurance
- Take out general liability insurance and professional liability insurance from Thimble
- Make sure you understand your insurance terms. (If you don’t, call your insurer!)
After all, the more protection you have, the easier it is to focus on what matters—scaling your business.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.