In our ever-changing and unpredictable world, businesses face a multitude of risks that pose significant threats to their daily operations and financial stability. While no business owner anticipates a financial crisis, most understand the importance of comprehensive insurance coverage to protect their assets from even the slightest risks. Traditionally, property and liability insurance have been the common coverages for claim filing. However, the recent shifts in societal dynamics and the global landscape have brought a different coverage to the forefront: Business interruption. Business interruption insurance has emerged as a key component of any comprehensive insurance program and is now essential as our global risks change in frequency and intensity. Recognizing the factors driving this shift and implementing effective risk management strategies will ensure your business remains vigilant against modern risks.
What is Business Interruption Insurance?
Business interruption insurance is essentially a coverage that provides financial assistance in the event that you can longer run your daily operations. As with any insurance program, coverage only applies to covered perils, which in this case is typically fire, wind, theft, lightning, and falling objects. Business interruption will provide financial assistance to cover the costs of any losses that apply to business operations during the window of time your business is unable to operate. These can cost such as lost revenue, payroll, relocation payments, rent payments, and training payments associated with any new equipment needed due to losses of a covered peril. Depending on the size of your business and the standard costs to operate, even a short window of interruption could lead to severe financial damage,
This type of coverage will not apply for excluded perils, which are typically floods and earthquakes. These perils are considered high-risk events and are challenging to qualify for or underwrite with most policies. Instead, they require specialized coverage. Additionally, this coverage will only pay up to the policy limits, and it is important for your businesses to properly assess how much coverage you may need.
Why is Business Interruption Rising in Importance?
Business interruption coverage has always been important, and something as seemingly small as a machine breakdown could halt operations for days. However, the significant increase in necessity is mostly attributed to global environmental changes, and the increased cost of operating.
In terms of the environment, storms and severe weather events are occurring more frequently and causing more extreme consequences compared to previous years. The aftermath of these events has resulted in long-term disruptions for numerous businesses, and in extreme cases put businesses into financial crisis. A prime illustration of severe weather events is the ongoing occurrence of wildfires. The recent incidents in California persisted for weeks, occasionally even months, leaving countless businesses unable to operate. The unpredictable nature of wildfires makes them impossible to anticipate, as they are natural occurrences that begin with no warning and can impact anyone. Therefore, even with adequate preparation, the risk remains. Unlike floods and earthquakes, fire is a covered peril. The same goes for wind and lightning, which are common causes of damage. So, in these instances, business interruption coverage could help cover the losses and assist in getting your business back to standard operations.
The increasing cost of living and operating is another key factor that contributes to the importance of business interruption. As we linger on the edge of a recession and witness annual spikes in inflation, it is evident that the overall cost of living has escalated. From construction materials to labor, rent, and mortgage prices, everything has experienced significant increases in recent years. Under these circumstances, if a business is forced to suspend its operations for any length of time, expenses accumulate at a much faster rate than ever before. Even a few weeks without income could potentially lead to bankruptcy for certain companies. However, by having appropriate coverage limits, business interruption insurance can offer financial support to help your business recover and regain stability.
Aside from these highly considered factors, each year we face new challenges that could lead to operational interruption. The Covid-19 pandemic was something no one expected, but everyone was impacted by it. Roughly 400,000 businesses closed during the pandemic due to an inability to recover from their overall losses. Hopefully, our world does not see another situation like Covid-19 for a long time, but if we do, proper insurance can be the one thing that keeps your business from shutting down.
How to Add Business Interruption Coverage
Business interruption coverage is typically bundled with a wider insurance program such as a business owners policy (BOP) that includes coverages like general liability and commercial property coverage. When you opt to add this coverage to your package, you will determine what limits you require based on the costs to operate your business and the potential risks you face for losses. There are two additional coverages that you may consider when adding business interruption:
- Contingent Business Interruption: this coverage protects your business from business interruption due to supply chain issues or interruptions at the supplier level. For example, if you rely on a supplier for materials that are required for your daily operations and they experience severe delays, you could receive financial assistance even though the interruption was not directly occurring at your business premises. This coverage is especially important as supply chain issues continue to be a point of frustration across the globe.
- Extended business Interruption: This coverage applies during the period of time after operations have been reinstated, but prior to returning to pre-loss income.
The exact requirements for coverage will depend on factors like company size, assets, employees, location, and industry. Working with a professional to determine what risks your business faces and how best to mitigate those risks will ensure you approach coverage in the most optimal way.
Insurance with ECBM
The risks businesses face change so rapidly, it can be challenging to ensure your risk management plan is adequate. Our team of consultants and agents have expert knowledge of business insurance and can regularly update your coverage needs to ensure all potential gaps are filled. If you are like many other businesses in the world that face the risk of business interruption, ECBM can ensure that your limits and coverage options put you in the best possible position in the event of a claim. For more information on how we can serve your business, contact one of our agents.