Business Interruption Insurance

What Is Business Interruption Insurance?

Business interruption insurance is insurance coverage that replaces business income lost in a disaster. The event could be, for example, a fire or a natural disaster. Business interruption insurance is not sold as a separate policy but is either added to a property/casualty policy or included in a comprehensive package policy as an add-on or rider.

Understanding Business Interruption Insurance

Business interruption insurance premiums (or at least the additional cost of the rider) are tax-deductible as ordinary business expenses. This type of policy pays out only if the cause of the business income loss is covered in the underlying property/casualty policy. The amount payable is usually based on the past financial records of the business.

Business interruption insurance coverage lasts until the end of the business interruption period, as determined by the insurance policy. According to the Insurance Information Institute, the standard policy is 30 days, but using an endorsement can extend it to 360 days. Most business interruption insurance policies define this period as the date that the covered peril began until the date that the damaged property is physically repaired and returned to the same condition that existed prior to the disaster. There may also be a waiting period of 48 to 72 hours.

What Business Interruption Insurance Covers

Most business interruption insurance covers the following items:

Business interruption insurance is not sold as a separate policy but is an add-on to an existing insurance policy.

What Business Interruption Insurance Does Not Cover

According to the Insurance Information Institute website, you will not be covered for:

Special Considerations for Business Interruption Insurance

Note that the insurer is only obligated to pay if the insured actually sustained a loss as a result of the interruption. The amount that will be recouped by the business will not exceed the limit stated in the policy.

Business Interruption Insurance and Pandemics

Not surprisingly, what business interruption insurance does and does not cover has come under particular scrutiny during the COVID-19 outbreak and the business shutdowns and curtailments that resulted. The answer, unfortunately, is that for the most part policy holders will not be covered.

"The standard business interruption policy only applies when the business sustains direct physical loss or damage, such as a fire," says James Lynch, FCAS MAAA, chief actuary and senior vice president of research and education of the Insurance Information Institute. "Business interruption can also apply when a nearby business sustains direct physical loss or damage and a civil authority like the government closes all businesses as a result."

Viruses don't actually break anything. As Michael Menapace, a partner at Wiggin and Dana and professor of insurance law at Quinnipiac University School of Law, told Jeff Dunsavage of the Insurance Information Institute: "The virus...[compared to a fire or broken windows from wind damage], leaves no visible imprint." 

Even all-risk business interruption insurance has exclusions. And, especially since the SARS outbreak of 2003, those exclusions have tended to include losses from viruses and communicable diseases, Dunsavage notes.