Business interruption insurance is designed to protect your business if your business premises is physically damaged and there is a suspension or halt of business activity at that location. It is not typically a “free-standing” insurance policy—rather, it is an additional coverage that can be added to a property damage insurance policy (i.e., fire policy) as an endorsement or a rider (for an additional fee, or course). In other words, if you don’t ask for it, you don’t have the protection it offers. This type of additional insurance protects against your inability to continue business operations because of events outside of your control, such as severe flooding or another catastrophic events, and is intended to place your business in the same position had the event causing the suspension of business activity not occurred. For example, if you have to move your business from one location to another, even temporarily, there will be expenses to do so, or you may not be able to conduct business at all and lose profits. Business interruption insurance can protect against these events.
Insurers usually offer two different types of business interruption coverage: a valued policy and an open policy. In a valued policy, the insurer and insured agree upon a fixed amount, in advance, to be paid in the event of a business interruption. An open policy covers any provable loss resulting from an interruption and requires the insured offer verifiable, competent proof of the damages in order to collect the proceeds. The burden of proof for reimbursement varies according to specific policy language. For example, under a sole cause standard, the insured must prove that physical damage claimed under the other portion of the policy was the only (sole) reason for the halt of business operations. Some coverages will allow the insured to relocate when severe physical damage has occurred, and, so long as the insured attempts to mitigate the damages, the insurer will typically authorize payment for reimbursement of costs.
Business interruption coverage protects businesses more fully than a fire or property loss insurance policy alone. In recent years, we have seen some horrible storms, including Hurricanes Katrina and Sandy. Business interruption coverage is designed to help businesses that are negatively affected from these types of storms and other catastrophic events and may be considered a necessary business expense.