This article focusses on Business Interruption insurance (also known as Business Income Insurance) which is a relatively less popular insurance coverage as compared to other coverages. However, this article highlights its meaning and importance in depth. It also explores how the BI coverage has been perceived globally for business loss claims arising due to COVID 19.
What is a Business interruption insurance?
BI Insurance is an insurance that provides coverage against loss of income when your business is shut down due to a covered peril.
Covered perils usually include:
- Fire
- Theft
- Earthquakes
- Floods
- Wind
The following illustrations will help us understand BI Insurance:
- Your shop catches a fire, as a result of which your business needs to shut down while you repair the damages. In this case if you have a BI insurance, it can help pay your lost income during this time.
- Thieves break in and steal valuable inventory from your electronics store, due to which, you have to temporarily shut down while you replace your inventory. Your BI insurance can help cover your lost income during this time.
- You own a factory and an earthquake hits in your area and your building suffers from extensive damage. As a result, you must shut down your operations to repair the damages. Your BI insurance can help cover your lost income during this time of restoration.
Is Business Interruption insurance different from a Commercial Property Insurance?
BI insurance is one of the most overlooked business insurance policies. Many business owners misunderstand the difference between a commercial property insurance and BI. A commercial property insurance policy only covers against the physical damages to property caused due to the event and not the resultant financial loss of business income due to interruption of business. A BI insurance coverage is usually an add on policy to the commercial property insurance policy.
Example: A heavy rainfall causes serious water damage at a restaurant. The expected repair & renovation time is over 6 months. While commercial property insurance covers the cost of repairs, the owner can’t make money while the restaurant is under repairs. In such a scenario the BI insurance helps recoup the lost revenue.
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What does a Business Interruption Insurance cover?
Most BI insurance cover the following items:
Lost revenue: Based on previous financial records and performance of the business, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
Fixed costs: These can include operating expenses and other incurred costs of doing business. E.g. The businesses might have to continue paying rent or lease payments even while the business is not making money, such fixed cost would get covered.
Relocation to temporary location: Some policies cover the costs involved with moving to and operating from a temporary business location. E.g. An intruder breaks into an office, vandalizing the office and breaking several windows. The business is forced to relocate to a new office space until the windows and locks are replaced. BI insurance pays for moving costs and rent at the new location.
Commission and training cost: In case a company needs to replace machinery and retrain personnel to use the new machinery due to the event, the policy would cover these costs.
Employee wages Coverage of wages is essential if a business does not want to lose employees while shutting down. This coverage can help a business owner continue paying salaries when they cannot operate. E.g. A pipe bursts outside a shop, flooding the shop and destroying walls, carpeting, and furnishings. The shop is forced to close for a month for renovation and replacing inventories. BI insurance helps the firm meet payroll obligations while the repairs are underway
Taxes Even when disaster hits, businesses will have to continue paying the taxes. BI coverage will ensure a business can pay taxes on time and thereby avoid penalties.
Loan payments Loan payments are often due monthly. BI coverage can help a business make those payments even when they are not generating income. E.g. An electronics showroom is forced to suspend business after a massive fire destroys the premises. While the business isn’t functioning and bringing in revenue, it would still need to make monthly payments on a business loan taken prior to the event.
What does a Business interruption insurance not cover?
Property damage:
BI insurance covers the financial but not material costs of a temporary shutdown. Property damage caused due to the event is covered by commercial property insurance.
Example: A fire is caused at a factory, that destroys machinery and inventory and causes need for major repairs. Commercial property insurance pays to replace the machinery and inventory and for repairs to the building. However, a BI insurance compensates the business for the revenue it lost while recovering from the disaster i.e. a temporary closure of the factory in this example.
Extra expenses
Extra expense means expenses over and above the regular expenses paid for running business. e.g. Cost of leasing an equipment, hiring temporary staff that can help get the business up and running. BI insurance usually covers only for fixed costs during a temporary shutdown and not for the extra expense. Extra expenses can be covered by taking an extra expense coverage as an add on policy.
Example: A earthquake leaves a small town without power and electricity, forcing a local nursing home to close. The nursing home provides essential medical services, which it needs to resume as soon as possible. Extra expense coverage would help the nursing home to lease new equipment and pay its staff overtime so it can respond effectively to the crisis.
Contingent business interruption
BI insurance only covers losses caused directly by your own businesses closure, however at times your business can suffer indirectly when another company that you’re dependent on shuts down temporarily or permanently due to property damage. A basic BI policy would not cover such a loss. A contingent BI insurance policy can be considered in such cases which covers you for the loss caused by loss of a primary supplier, partner, or customer affecting your ability to do business. This add on policy is highly advisable when your business is dependent on a single supplier/manufacturer or on a few major customers etc.
Does business interruption insurance cover loss of business income due to lockdown caused by COVID 19?
The question whether BI insurance covers business loss caused due to lockdown as a result of COVID 19 is trending globally. The answer here is usually ‘No’. In India, BI Insurance is sold as a coverage along with commercial property insurance and not as a standalone policy. Hence BI cover can be taken only along with an underlying insurance policy for the covered peril e.g. fire insurance or as industrial all-risk insurance which covers both property damage and BI.
Hence for the BI cover to trigger, it is necessary for the property insured to suffer physical damage due to a covered peril such as fire, flood or earthquake. Since the temporary closure of business is caused due to lockdown and not due to any physical damage to the property, the physical damage trigger does not get evoked. A public advisory regarding exclusion of COVID 19 from BI coverage was issued by General Insurance Council (GIC)1 Re of India on 21st April 2020. This advisory is being opposed by the effected class of businesses in India.
Globally too, businesses are claiming COVID 19 business losses under Notifiable disease/infectious disease extensions available in few countries under the ambit of BI policy. This extension will apply if a disease is found on the premises or within the vicinity. It will cover situations where premises have been infected by a highly contagious disease and needs to be closed for deep cleaning and disinfection. Depending on the wordings of the contract, businesses may be able to claim COVID 19 business losses if the policy extension covers “notifiable diseases” instead of a “specified list” of diseases. Also there needs to be a reported corona case in your premises or nearby vicinity to be able to claim. Hence this extension also provides limited respite to the businesses as most policies have a “specified list” of diseases and since COVID 19 is a new disease it is unlikely to be specified in existing insurance covers. Also an owner deciding to shut down as a precautionary measure without any reported case, will not be covered under the policy.
Businesses are also taking respite for COVID 19 business losses under the “Denial of access” extension under the BI policy. A denial of access extension will apply if you are required to close your business under the orders of an appropriate authority in the context of an emergency. It will cover situations where access to a business is prevented or restricted due to a nearby incident, for example a gas leak. Again it is interesting to note that voluntary suspension of operations, to avoid spreading the virus before the official notification has been announced by the appropriate authority, would not be able to claim on their policies.
There is uncertainty whether policies provide cover for losses arising from COVID-19. In future it remains to be seen whether insurers will develop tailor made policies providing specific cover by way of an extension to the traditional BI policy or whether BI policies will continue to be narrowly drafted and exclude coverage for infectious diseases and pandemics.
Should businesses consider taking a Business Interruption Insurance Coverage?
There is no standard reply to this answer, it would depend and vary from business to business. No one can predict an event like fire, flood, earthquake etc. Nor can one predict the extent of destruction that it shall cause to your business. Some businesses may have a well-defined business continuity plan which might help them to take a faster response to such events and thereby not affecting their business’s ability to continue its operations. e.g. a firm affected by a fire could move into a co working space and continue its operations.
However, if your business is such that it maintains huge quantities of stock, or has state of the art technology which cannot be restored in a short span then you should consider looking at a BI policy to help you get back on your feet. We must also consider other non-economic factors like losing out customers if the business remains shut for a short span, as these could impact your revenues in the long term.
Businesses must carefully understand the features, inclusions and exclusions of a BI Policy and assess their need to take a BI coverage. Special attention must be paid to ensure that appropriate add on policies are taken to suit the business needs and provide maximum required coverage.