No matter what caused the damage to your business, a large loss could cause you to close your doors for weeks or more, interrupting your supply chain and sending your customers elsewhere. Fortunately, your insurance carrier may provide the funds you need while you suspend normal operations—as long as you have made the right coverage selections beforehand. Attorney Bill Voss explores the finer points of business interruption insurance, including how owners can maximize their payouts after a covered loss.
When Will an Insurer Pay for Business Interruption?
There are many misconceptions about business interruption insurance (BII), including that it is a “blank check” to cover all of the income losses related to an adverse event. In reality, insurers protect themselves from paying large amounts in business income just as they limit their coverage for any other loss.
Firstly, business income insurance is not automatically included in a business owner’s policy. Owners must select a BII endorsement and have it added to their policies as an optional form of coverage.
Second, insurers will not pay for income losses if you did not suffer any loss of income. This may seem straightforward, but there are ways that this may be misinterpreted by property owners. For example, if your business suffers damage on the weekend (outside of normal business hours) and you are able to reopen on a limited basis on Monday, you may still have a claim for partial closure until the structure is repaired.
Third, most commercial property insurance policies provide coverage for business income only when it results from direct loss or damage to the insured property. This means that if your property was not physically damaged, your insurer may not provide business interruption coverage.
Finally, there are time limits on claims arising from property damage losses—including business interruption. Failing to meet all of the deadlines when filing a claim is one of the most common reasons these claims are underpaid (or denied completely).
How Much Will I Receive for Business Interruption?
When calculating the amount of business income payments, insurance carriers typically provide the reduction in net income that would have been earned to cover the insured’s continuing normal operating expenses. Business income coverage is usually paid in the amount of actual loss sustained, allowing the business owner to continue to provide payroll and pay expenses while repairs are underway.
Unfortunately, there are many factors that can affect the actual amount that you will receive for the business interruption portion of your claim. The amount paid can vary widely depending on the limits and exclusions set forth in your commercial property damage policy.
For example, you may be paid less than the full dollar amount of your income losses due to:
- Cause of loss. If the insurance company does not provide property damage coverage for an event, it is unlikely that the insurer will cover any business interruption for that event. For example, some private insurers may not cover property damage for certain perils, such as earthquakes or natural flooding.
- Construction delays. Insurers are liable for business income lost from the date of damage to the date that the property should reasonably be repaired. However, there are usually maximum time limits set on the period of restoration (six months on average), which may not extend to the entire length of time needed to repair the damage.
- Policy limits. Insurers are under no obligation to pay more than the applicable policy limit, regardless of whether the policyholder’s losses exceed that amount.
- Bookkeeping problems. Insurers will want proof of your income and operating costs before they issue you any payment. Owners who lost their paperwork in a fire or do not use professional accounting services may not be able to provide accurate records of their earnings and payroll records, making it unlikely that they will get fair payment on their claims.
How Can I Get the Most Out of My Business Income Insurance?
When purchasing your business interruption coverage, it literally pays to select customized coverage options that fit your company’s needs. For example, if you work out of a historic building or in a remote location, you may wish to extend the period of restoration. Insurers may offer extensions of 30 days up to 2 years, allowing you to take the time you need to restore your property without added stress.
In addition to extending time limits and the policy limit, you may also wish to purchase extra expense coverage. Extra expense insurance pays for costs incurred related to the adverse event during the period of restoration, and may even extend coverage to business income losses resulting from:
- Service interruption. This coverage pays for direct physical loss caused by an interruption in electrical, gas, water, telephone, sewer, or other utility or service caused by the same (or similar) peril that resulted in the insured’s property damage.
- Leader property. This endorsement is vital for businesses located near to a major customer attraction, such as an amusement park, mall, or casino. With this coverage, insurers pay for the owner’s business income loss if the leader property (not owned by the insured) suffers a direct physical loss, depriving the owner of foot traffic and increased customer presence brought by the leader property.
- Seasonal business coverage. This endorsement is ideal for businesses who make most of their money in a few weeks or months of the year, preventing one adverse event from affecting an entire year’s profits. If the business is forced to close during the busy season, the insurer replaces income, cancellation fees, ticket sales, and other losses so that owners can still end the year in the black.
- Contingent business interruption (CBI). This coverage pays for income loss resulting from another person’s property damage, particularly someone who directly supplies you with goods or services. Owners can collect business income loss payments, even if they did not experience direct physical damage.
Let Us Advise You on Your Business Interruption Claim
If you have taken diligent steps to file your business interruption claim but aren’t being treated fairly by an insurer, we can help. Our insurance litigation attorneys will work to maximize your insurance claim, and we do not collect our fees until your case is resolved. Simply fill out the form on this page today to contact an insurance attorney at the Voss Law Firm or order a free copy of our book, Commercial Property Owners Must Read This BEFORE Filing an Insurance Claim.