What is Business Interruption Insurance?

At first glance, “business interruption” seems easy to understand. It provides coverage if your business is interrupted. These policies can have some tricky details, though.

The Basics

As the International Risk Management Institute explains, business interruption insurance actually comes in three varieties. First, there is the basic business interruption insurance that is meant to compensate for income lost due to physical damage to property. Second, extended business interruption insurance will cover income lost after the property is repaired but before income is back to previous levels. Finally, contingent business interruption covers lost income due to physical damage to the property of third parties, like suppliers or consumers of the insured company.

Can it Help a Professional?

A professional services firm should always consider business interruption insurance. A doctor’s private practice, for example, could be ground to a standstill for any number of reasons. A natural disaster could block patients’ access. A fire could ravage the necessary medical equipment. The electricity or water could go out and render the office unusable. More and more companies are insuring against damage to computer hardware as well.

Many professional services firms lack significant savings. That means they could be counting on the income coming in every day in order to make payroll at the end of the month. In this case, losing a few days of income could be a serious problem. Being out of commission for a few weeks could be devastating. Business interruption insurance helps ensure that a temporary physical problem does not put a firm out of business.

Documenting the Loss

A big challenge can be proving “lost” income. Some insurance policies will set the value of lost income in advance. This can avoid having fights down the road, but it will not always result in an outcomes that takes relevant factors into account. Either way, proper documentation is key.

A claims adjuster will typically look at financial statements, tax returns, vendor statements, customer orders, market forecasts, and other verifiable sources to calculate losses. For a doctor, for example, the adjuster might look at all the actual appointments that had to be cancelled due to the interruption. For a longer interruption, the adjuster might look at the average earnings during a given day in the same season in previous years.

When you file a business interruption coverage claim you will need to start with the basics, meaning the time and date of the loss and the property damaged. Next it is important to contact the insurance company and listen to any instructions they may have. For example, if your office is shut down by a fire the insurance company may find you a new temporary office immediately to limit the losses. You will usually need to honor their requests or the insurance company may refuse to pay you for money that you should have earned in the temporary office.

Disputes Are Common

Insurers and policyholders will often be at odds over losses. For example, the policyholder might think he was in the middle of a hot streak and may not be content with the adjuster relying on average earnings. Most people will never deal with business interruption insurance, so a lawyer that is experienced in this area can be a great resource to prevent and resolve disputes.