What is ‘Business Interruption/Income Insurance’?
Business interruption insurance (also known as business income insurance) is a type of insurance that covers the loss of income that a business suffers after a disaster. The income loss covered may be due to disaster-related closing of the business facility or due to the rebuilding process after a disaster.
Most commercial property insurance policies provide coverage for business income loss by adding an endorsement to the insured’s property policy. This endorsement is designed to protect the insured for losses of business income it sustains as a result of direct loss, damage, or destruction to insured property by a covered peril. Although many such clauses are in use today, a typical business income insurance clause reads as follows:
We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
In order to better understand business income insurance let’s explore the three terms highlighted above:
Actual loss sustained
Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy.
The insurer is only obligated to pay if the insured actually sustained an interruption of business leading to a business income loss. If the insured does sustain a business income loss, the extent of the insurer’s obligation is limited to the dollar amount of loss actually sustained, but not to exceed the applicable policy limit.
Business income
Usually, the carrier is liable for the reduction in net income that results from suspension of operations—whether wholly or partially—due to a physical loss at the insured’s premises. This following commonly used definition of business income is intended to clarify what sums can be included when calculating the amount of loss.
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“Business income includes the net income (net profit or loss before income taxes) that would have been earned or incurred by the insured and the continuing normal operating expenses incurred, including payroll.”
Period of restoration
Insurers are liable for the loss of business income only during the period of restoration, which is often defined as the length of time required to rebuild, repair, or replace the damaged or destroyed property. The period of restoration begins when the physical loss or damage occurs; it ends when the property should, with reasonable speed, be repaired or replaced.
Expiration of the policy does not end the period of restoration. As long as the physical loss occurs during the policy period, the business income coverage will provide coverage for the duration of the period of restoration, even if the policy expires before the period of restoration ends
The business income endorsement published by the Insurance Service Office (ISO)—as well as some insurer forms—includes a 30-day extended period of restoration beyond the standard period of restoration (the period from the time of loss until the time of repair or replacement).
However, the insured may require more than this 30-day limit. To address this issue, an insured may elect to increase this limit from 30 days to any multiple of 30 days up to 720 days. This is accomplished by purchasing the extended period of indemnity optional endorsement offered through ISO.
