With millions of businesses currently on the verge of closure, business interruption insurance is getting increased attention. Business interruption insurance, also known as business income insurance, can be an effective lifeline during times when revenue takes a drop.
Business interruption insurance has always been an important coverage option for small businesses and large companies alike. However, with unstable operating environments predicted into the future, it is now more important than ever that business owners are aware of the benefits of business interruption insurance.
Keep reading to find out what these are.
What Is Business Interruption Insurance?
Before we get into the advantages of business interruption insurance, what is it exactly? Business interruption insurance, or business income insurance, is a type of coverage that pays out in the event that your business experiences a loss of revenue due to physical damages.
This damage can be to property, equipment, machinery, vehicles, etc. Certain policies even cover revenue loss stemming from cyber-attacks. Take note that for a claim to be valid, the damage will need to be the direct cause of your revenue loss.
1. Business Interruption Insurance Can Compensate You for Lost Revenue
The purpose of business interruption insurance is to ensure that a temporary shutdown in your business won’t result in indefinite closure. If you have lost revenue due to property damage, business interruption insurance can cover you for lost revenue.
This can be an invaluable source of funds, and make the difference between a manageable setback and business liquidation. Business interruption insurance is claimable if you have experienced a loss of business and revenue due to physical damage to your property.
This includes flooding, fire damage, hurricane damage, etc. For example, if you operate a farm and your tractor is out of action for a month while parts are on order, you can instigate a claim for lost revenue.
2. It Can Allow You to Keep Your Office or Relocate
If your office has suffered damage, and you can’t operate for business, you may still have to pay your lease or rental during this time. Without revenue, this can be a disaster for many businesses. If you have business interruption insurance, you can utilize a portion of your claim amount to cover rental and lease expenses.
The benefits of this are that you will be able to keep your lease and your office. If things are such that you have to move offices, due to an event that causes physical damage, business interruption insurance can cover this as well. The payout you receive can also help you to make the initial rent or lease payment required for the new office.
3. Business Interruption Insurance Will Help You Pay Your Taxes
Just because revenue has taken a hit does not mean that you won’t need to pay taxes. It is true that a drop in revenue will bring down your taxes for the current financial period. However, your business will still need to remit any taxes that are due for a previous period.
If business was going well, this means that you might owe a substantial amount, even though your current revenue may be non-existent. If you are unable to pay taxes that are due, this will incur interest with the IRS.
To avoid this, one option is to apply for a business loan to settle the tax debt. However, this too, will cost you money because of interest payments. On the other hand, if you have business interruption insurance, you may be able to use your payout to settle your taxes, thereby saving on interest payments.
4. With Business Interruption Coverage You’ll Be Able to Pay Your Employees
One of the biggest fears of many business owners is not being able to pay their employees. If an unforeseen disaster takes place, this fear might become a reality. Unless, of course, you have coverage for these types of events.
One of the purposes of business insurance is to allow you to pay your workers their salaries and wages, even if the rug has been pulled from under your business. Not only does this allow you to pay what you owe, but it also ensures that you can retain your employees, even if your business is temporarily closed.
Being able to retain existing employees is key to a successful recovery. The reason for this is that it’s costly to re-hire staff. Employee turnover is renowned for its hidden costs, something you can ill afford after suffering a temporary closure or loss of revenue.
Having to re-hire staff will create a handicap upon reopening, as you will have to train your new employees. By taking out business interruption coverage, you can avoid this scenario. What’s more, you can rest assured that you won’t let your employees down, and they will be assured of a job, even if your business experiences an unexpected setback from physical damages.
Side note: if you have yet to set up payroll for your business, check out our post on the best payroll services.
5. You’ll Be Protected from Defaulting on a Business Loan
Do you have a business loan? If so, defaulting on it can damage your credit score and net you additional fees, penalties, and interest charges. However, if your business’s revenue is slashed overnight—you might not have a choice.
This is another area where business income insurance can be of great benefit. If you receive a claim, you can apportion part of the payout towards your loan payments. Not only will this take away the stress of having debt installments you can’t meet, but it will also save you money in potential penalties.
6. Natural Disasters Are on the Rise
Given that no one can predict the future, business interruption insurance is almost always a good idea. However, it is becoming increasingly worthwhile as natural disasters seem to be increasing in frequency.
Reports state that the global damage from natural disasters is increasing rapidly, and now averages about $142 billion per year. This is a sharp increase compared to 20 years ago when the annual average damage was $36 billion. Large-scale weather events are increasing in magnitude, earthquakes, wildfires, freak hailstorms, hurricanes, tsunamis, and tornadoes are becoming more frequent.
The level of natural disaster risk you face will depend largely on your location. For example, if your business is located in Florida, hurricanes can pose a significant threat to your business’s operations. And if you are in Texas, you probably don’t need us to tell you that tornadoes could damage your business and stall your operations from one day to the next.
On the other hand, if you reside in a state such as Ohio, you likely have a lower chance of physical damage from natural disasters. However, this doesn’t mean that business interruption coverage is a bad idea. Even if your area experiences few natural disasters, business interruption coverage may still be highly worthwhile.
7. You Can Get Riders for Additional Coverage
Basic business income insurance limits coverage to that which compensates you for lost revenue and allows you to pay things like taxes, payroll, rent, loan payments, etc. However, if you wish to opt for additional coverage that will ensure extra expenses, such as leasing new equipment, you can do so through an extra expense rider.
Another rider you can take out is for contingent business interruption. If a business that you rely on shuts down (either temporarily or permanently), this can affect your business’s ability to earn revenue. Under a contingent business interruption rider, you will be covered for this event. This rider will apply, even if the event did not force your business to close.
8. COVID-19 Triggered Business Interruptions Are Likely to Continue
Many of you reading this might be doing do so in response to business interruption caused by the COVID-19 pandemic.
COVID-19 has wreaked havoc in numerous sectors. With previous pandemics reported to have lasted as long as 36 months, this disruption is likely to continue. What’s more, experts are predicting that the coronavirus is likely to become endemic. In light of this, businesses are likely to weather ongoing and unforeseen COVID-19 related impacts.
Unfortunately, business interruption coverage as it stands now does not cover events such as pandemics. However, if you have business interruption coverage and a rider for contingent business interruption, you may be covered in the event that a company or customer that your business is dependent on shuts down.
Do You Need Business Insurance? We Can Help
Business interruption insurance is one of those things you won’t know you need until disaster strikes. When you do need it, this coverage can be the difference between survival and business closure.
If you are on the hunt for the best insurance products for your business, be sure to take a look at our business insurance page. By filling out our 90-second application, you will quickly be introduced to insurance companies from within our network of vetted providers.