Business interruption coverage is a type of coverage found in many commercial property policies that seeks to reimburse a business owner for lost profits and additional expenses that an insured suffers because the insured’s premises is damaged causing a complete cessation in the business. Broadly speaking, this coverage applies until the damaged location is repaired or rebuilt (or should have been repaired or rebuilt). It is designed to put the insured business in the same position it would have been in had the loss not happened. The Texas Department of Insurance provides a good simple explanation of this coverage here.
In general, to qualify for recovery under this coverage, an insured must show (1) that a covered peril (a cause of loss- like a tornado, hurricane, storm or fire) (2) caused direct physical damage or physical loss (3) to insured property or property at the described location (4) during the policy period (5) that resulting in an actual loss of business income (6) due to the necessary suspension of the insured’s operations. See Peter E. Kanaris, ANALYTICAL APPROACH TO BUSINESS INTERRUPTION, EXTRA EXPENSE, AND CIVIL AUTHORITY COVERAGE ISSUES, 43 Tort Trial & Ins. Prac. L.J. 113. Policies may also refer to the necessary “cessation” or “interruption” of operations.
The coverage will provide reimbursement for lost profits if they can be proven with reasonable certainty. Usually, financial statements showing pre-loss profits and financial statements showing the post-loss lost profits must be produced. In addition, expenses that were not incurred due to the cessation of operations must be deducted from any recovery of lost profits. For example, if a business did not have to pay a utility bill at the location due to the shut-down, the money that the business saved by not paying the bill would be deducted from any recovery.
In addition, an insured may recover additional expenses incurred due to the shutdown. These might include items like the cost of renting a generator or other equipment, additional payroll, or clean-up costs.
One often disputed question is whether the coverage period ends once the insured is back up and running but not yet fully restored to profitability or whether it continues until the business reaches pre-loss profits. See Jay Levin, When Does Business Interruption Coverage Stop?, IRMI 2008. Often the answer will depend on what state law governs, what the specific policy form says, whether the insured purchased extended business interruption coverage (below) or whether the premises have been fully repaired or restored.
In addition to business interruption coverage, a business can purchase extended business interruption coverage and contingent business interruption coverage.
"Extended business interruption " provides coverage, typically limited by a period of time, for the income lost after the property is repaired but before the income returns to its pre-loss level.
"Contingent business interruption" provides coverage for the insured's loss of income resulting from physical damage, not to its property, but to the property of providers or suppliers on the one hand or consumers of its product or services on the other.
Douglas Berry, The Basics of a Business Interruption Claim, IRMI 2000. These additional coverages provide even more protection in the event that a business has to shut down due to a loss.
In summary, this coverage is a very important coverage for business owners. If you own a business and are looking for insurance, make sure to ask about coverage and get a full explanation from a broker or independent agent specializing in business coverages. If you have had a claim, make sure to review your policy and gather together your financial statements and receipts. If you have any questions or if we can help in any way, please contact us.