What Is Business Income Insurance? Businesses It Can Benefit

Business income insurance, also referred to as business interruption insurance, offers financial protection by compensating for lost income in the event of physical property damage that hinders business operations due to specified perils covered in the policy.

During an extended shutdown, these insurance policies can provide the necessary financial assistance to meet payroll, cover rental expenses, and maintain essential business operations.

Typically included in a business owner’s policy alongside property and liability insurance, business interruption insurance is often more cost-effective when bundled, as opposed to purchasing individual policies.

Additionally, there is the option to augment a commercial property policy with an endorsement or rider to address income loss resulting from property damage.

What Is Business Income Insurance? Businesses It Can Benefit
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This coverage is generally advantageous for entrepreneurs with physical establishments offering products and services, as well as equipment or other income-generating properties.

For instance, proprietors of a coffeehouse, barbershop, or car rental agency may face income loss if their properties sustain damage.

What does business income insurance cover?

Business income insurance covers specific business expenses only if the closure results from covered perils listed in the policy, such as theft, fire, wind, lightning, or falling objects.

What does business income insurance exclude?

Damages from floods, earthquakes, and communicable diseases are not typically covered.

Business income insurance supplements commercial property insurance.

For instance, if wind damages your store’s roof, the repair is covered by commercial property insurance, while business income insurance can cover lost income during the closure.

What expenses are covered by the policy?

Typically, a policy aids in offsetting lost business income and operational costs until a business resumes operations.

While coverage specifics vary, common inclusions are:

  1. Lost net income.
  2. Payroll expenses.
  3. Loan payments.
  4. Mortgage, lease, and rental payments.
  5. Taxes.
  6. Routine bills.
  7. Temporary relocation expenses.

The lost net income is determined from the business’s financial records, requiring documentation like sales records, profit and loss statements, tax returns, payroll records, and other pertinent information.

How long does coverage last?

What is business income insurance
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Your policy covers defined expenses for a set restoration period. Typically, it’s 30 days but can extend up to 360 days.

There’s usually a waiting period after property damage, ranging from 24 to 72 hours.

What factors affect my premium?

Insurers use a risk assessment for your premium. It’s influenced by factors like coverage amount, based on estimated income and repair time. More coverage means higher premiums.

Business type matters; a high-risk business pays more, like a restaurant versus a shoe store.

Employee count affects premiums; more employees mean higher costs.

Location matters; areas prone to storms pay more than those with moderate weather.

Prior claims increase rates; past business income insurance claims result in higher premiums.

Additional options and endorsements

Although insurance policies vary on terms, coverage and options, you may be able to add the following to expand your coverage for a business interruption:

Dependent properties coverage

Dependent properties coverage, also known as contingent business interruption insurance, protects against income loss from damage to external properties vital to your business.

Examples include suppliers’ warehouses or key facilities.

For instance, it can safeguard against a fire that destroys your main supplier’s warehouse, halting your production.

This coverage applies to suppliers, buyers, providers, anchor stores, venues, or entities that draw customers to the area.

Extra expense coverage

Add extra expense coverage for costs beyond regular operating expenses, such as temporary space rental, equipment leasing, additional payroll for overtime or new hires, and other expenses not covered by your business income insurance.

Utility services endorsement

This endorsement could cover lost income that’s the result of disruptions to basic utility such as electric, gas or water service.

Civil authority coverage

This coverage applies when a local, state or federal government entity restricts access to your premises as a result of damage to a nearby property not owned by you.

Read more: What is business interruption insurance?

What else should you know?

Review your policy thoroughly

Pay attention to the specifics. Understand what’s covered before purchasing the policy, rather than discovering limitations when you need to make a claim.

Thoroughly examine details regarding:

  1. Events that activate coverage.
  2. Excluded causes of loss.
  3. Income and operational expenses.
  4. Duration of recovery.
  5. Waiting period.

Understand the waiting period

Check if the policy has a waiting period. Get details. Are you liable for losses in the 24 to 72 hours? Does insurance cover losses after the waiting period? If not covered, can you shorten the waiting period?

Keep your claim documentation

If you file a claim and it is denied, keep your documentation. You may be able to appeal the denial, qualify for another form of assistance or take a deduction on your federal tax return.

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