The widespread COVID-19 outbreak has interrupted businesses and forced them to scale back or shut down operations to comply with the lockdown order. This interruption in business in the US has resulted in huge losses. Subsequently, a certain section of the US Congress sent a letter to major insurance companies in the country on March 18th. The letter suggested that the insurance companies work with companies and their payout claims as part of the business interruption policies because the existing clauses may otherwise restrict or prevent coverage. 

 

Insurance companies usually offer business interruption coverage (BI) through property policies. However, though standard BI also pays for financial losses due to an interruption in business operations, it still requires that the loss should happen because of direct physical damage to property. In the current scenario, a standard BI may arguably cover the closure of business for sanitizing a facility that has virus contamination as most courts find the contamination of property to be direct physical damage to that property.

What Exactly Is Business Interruption Insurance?

A business interruption insurance helps an organization protect itself against financial losses after a covered peril affects its business operations. Typically, covered perils are fire, theft, wind, lightning or falling objects. Make sure that you read your business insurance documents thoroughly so that you know which scenarios are covered by your insurance. 

An insurer will pay for the actual loss of revenue a business sustains due to closure of operations while restoring the facility. The cause of suspension must be direct physical loss, destruction or damage to the property. 

We can understand the business interruption insurance better by exploring the three terms given below:

Actual Loss: Business interruption insurance provides coverage for the actual loss sustained by a business due to direct physical loss or damage to the business property by a peril that is not excluded from the policy.

In such a scenario, an insurance company is only liable to pay if a business owner actually sustained a business interruption that resulted in revenue loss. If a business sustains revenue loss, the obligation of the insurance company is limited to the extent of the actual loss in dollar amount, but it must not exceed the applicable policy limit.

Business Revenue: Usually, an insurance company is liable for the reduced net income that results from the closure of business operations (wholly or partially) due to a physical loss at the business facility. 

Restoration Period: An insurance company is liable for the loss of business revenue only during the restoration period. The restoration period is often defined as the duration or time frame necessary to repair, rebuild or replace the destroyed or damaged property. The restoration period starts when the physical loss or damage happens, whereas it ends when the business property goes through the process of repair or replacement at a reasonable speed. 

Read Also: The Impact of COVID-19 on the US Insurance Sector

The Coverage Limit

Typically, business interruption insurance comes with a coverage limit. The coverage limit is the maximum amount an insurance company will pay towards a covered claim. If financial losses exceed the coverage limit, then it will be the responsibility of the business owner. This is why a business owner must choose the appropriate coverage for his/her business.

The following are a few things that business owners may want to consider while choosing the amount for business interruption coverage:

A probable duration of how long it may take to resume business operations and run full-fledged after a loss.

How well the facility is protected if the business owner rents out his/her office space.

Is a similar commercial facility readily available in the area of business or will it take time to find an appropriate temporary location?

Do the fire alarms and sprinkler systems in the facility work properly? 

If business owners are forced to shut down their business in large-scale due to a catastrophic event such as a storm, fire or earthquake, they will lose revenue. However, despite these events, business owners are liable to pay their bills and may have to incur additional expenses due to the disruption. Luckily, if business owners have business interruption coverage, many of these costs and losses are reimbursable. 

Understanding the Limitations of Business Interruption Coverage

Although a business interruption insurance can help businesses survive major disasters, several limitations and exceptions are an integral part of the coverage. As a business owner, if you have taken a business interruption coverage as part of a commercial property policy, you will receive an extended coverage only when the events are defined in the core coverage. For example, if your property insurance does not include windstorm damage, you will not receive business interruption insurance if your company’s business operation is interrupted due to a windstorm.

Besides, a business interruption insurance also has time limits on its coverage. So, make sure to discuss the exceptions and limitations with your insurance company or insurance representative. After the discussion, you can decide on purchasing an extended business income coverage for your business.

You need to consider the possible business interruption scenarios and the actual coverage available before buying a business interruption insurance. If we consider the ongoing pandemic, no one saw that coming. However, to get insurance for this reason, some changes in the insurance clauses along with government intervention is required. There are already many lawsuits in the US between the insured and the insurers on the business interruption clause due to coronavirus.

At Allied Brokers, we can assist you by providing adequate information on business interruption insurance and other types of insurance that are just right for you. Call us today at (650) 328-1000 and one of our representatives will contact you shortly.

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