Business Interruption insurance, also called Business Income Insurance covers the loss of a business that arises due to a natural disaster. The difference between a Business Interruption Insurance and property insurance is that in the case of property insurance, costs are paid only for the repairs and replacements of the physical properties of the business premises destroyed due to the disaster. On the other hand, Business Interruption Insurance covers the probable losses that the business would not have suffered if the disaster had not occurred. A Business Interruption Insurance cannot be purchased on its own; it is usually purchased in combination with other similar insurances such as property insurance or business owner’s policy.
For a Business Interruption Insurance, the costs are calculated from the date when the business meets with the disaster till the date when all the replacement work is concluded and the business is put back to a shape that existed prior to the disaster.
Some of the key terms associated with a Business Interruption Insurance
There are certain terms associated with a Business Interruption Insurance, and it is important to know what they mean. A brief description of some of those terms are provided below:
● Actual loss sustained- This term refers to the business losses suffered by a business due to a natural disaster. The loss can be in the form of damage to a physical property of the office due to which the business is unable to carry out its regular operations and hence suffers an economic loss.
The insurance policy usually provides a list of natural disasters whose consequential losses to the business is covered under the Business Interruption Insurance. There is also a limit to the amount that will be compensated by the insurance policy. Even if the business suffers losses amounting to more than what is laid out in the business conditions, the compensation to be paid will not exceed the maximum amount mentioned in the policy document.
● Business Income- This term refers to the income that could have been earned by the business had it not been affected by the disaster. The income is usually calculated prior to the payment of taxes. This loss in business income is compensated by the Business Interruption Insurance Policy.
● Period of restoration- This is the time period that starts from the date when the business is affected by the disaster and ends when all the repairs and replacement work of the business are completed, and the business is restored to its original situation. The insurance provides for all the business losses that are incurred during the period of restoration. Even if the policy expires before the end of the restoration period, the business will be compensated for the losses occurring until the end of the restoration period. As long as a natural disaster affects the business during the policy cover, the business is liable for complete compensation of the losses suffered during the period of restoration.
● Contingent Business Interruption- The losses suffered by a supplier or a customer of a business is covered under contingent business interruption. These could be due to damage to property, vandalism, fire outbreak, etc. Those businesses which purchase Business Interruption Insurance must request for this provision separately at the time of purchase. The circumstances under which a business can do so are as follows:
a) In case the business is dependent upon a single supplier and its materials
b) In case the business has a few customers who purchase most of the goods produced by the insured business
Any loss suffered by a single supplier or a few customers would directly affect the
profits of the insured business.
● Interruption resulting due to the orders of civil or military authority- The Business Interruption Insurance provides for the losses suffered by a business due to its inability to access its office premises owing to the order of a civil or military authority. It provides for the losses suffered continuously over a period of 14 or 30 days.
What does the Business Interruption Insurance cover?
The following losses are covered by the Business Interruption Insurance:
● Earnings of the Business- The possible losses that the business would not have suffered if it was not hit by the disaster. As mentioned above, the period for which the losses would be covered by the business is referred to as the restoration period.
● Relocation- The physical losses suffered by the business may be so severe that it might need to relocate its premises temporarily to another place. The costs of relocation — renting charges of the new place, transportation costs, etc. are borne under this insurance.
● Payments of the Employees- The losses suffered by the business may be so huge that it is no longer able to pay the wages to its employees. In such a circumstance, Business Interruption Insurance will take care of the wages of the employees.
● Payment of taxes- Businesses are not exempted from paying taxes if they are affected by a disaster. In such a situation, the insurance will pay the taxes on behalf of the business.
● Payment of Loans- In case the business has loans that need to be paid after a stipulated period of time, and it is unable to pay it due to the losses suffered because of the disaster, the insurance will pay off the loans on behalf of the business.
Things that are not covered under Business Interruption Insurance
The following things do not come under the ambit of the Business Interruption Insurance:
● Income that has no proof- In case the business has earned revenues for which there exists no documentation, that income will not be covered under the Business Interruption Insurance.
● Losses caused due to natural disasters that are not covered under the Business Interruption Insurance. Examples of such natural disasters include floods, earthquakes, etc.
● If there is a power cut due to heavy thunderstorms and such prolonged power cuts lead to losses for the business, then thoselosses are not covered under this insurance scheme.
Business interruption insurance can help your business sustain uncertainties. For stability, it is better to cushion and secure your future when presented with an opportunity to do so. PlanCover can address your queries and concerns with unbiased solutions that benefit your specific business and industry. For more details visit our website.