What is Business Interruption Insurance?

In the midst of an ongoing pandemic, along with reports of wildfires, hurricanes, and other catastrophic events, business owners are looking for protection and may wonder “what is business interruption insurance?” and “should I purchase coverage?”

Business interruption insurance is a way for business owners to protect their income and potentially stay afloat when faced with an unexpected event.

What is Covered by Business Interruption Insurance?

According to the Insurance Bureau of Canada, business interruption insurance (BII) will cover “losses caused by the perils listed in your policy. An all risk policy provides protection against loss caused by any risk that is not specifically excluded from your policy.” Such perils can include floods, fires, earthquakes, or windstorms, according to the Bureau.

Business losses covered by business interruption policies can include physical loss or damages, payroll and revenue losses, supply chain losses, and loan payment losses. In addition, coverage may be able to help business owners cover costs due to the unexpected event, such as fixed costs, relocation, and other expenses.

Coverage will also apply during certain time periods, called “indemnity periods,” states the Bureau’s website. The website lists two types of indemnity periods that apply to business interruptions. The first applies to earnings and is also called limited indemnity.

Limited indemnity policies only payout until the damage caused by the event is repaired or replaced. Limited indemnity policies are relatively cheaper than other business interruption insurance, but they provide less coverage, warns the Bureau.

Limited indemnity policies may stop paying out before the business returns to its previous income levels. The Bureau recommends that business owners consider whether they have the reserves necessary to weather a months long closure.

Further, limited indemnity policies may also restrict the time period the business is covered, even if repairs take longer. Additionally, they may only pay out a certain amount each month.

Business owners can purchase BII policies that protect their profits. Also called extended BII, the Insurance Bureau of Canada states that this coverage will continue to pay out until the business returns to its normal profitability level. However, even extended policies can be subject to maximum payout periods.

According to the Insurance Bureau of Canada, business owners can further enhance their coverage by purchasing policies that cover additional expenses in the event of a business interruption. The Bureau recommends owners consider what would happen to their business in the event of damage – is it essential to the community and need to remain operational? Could the business be moved to another location? The answers to these questions will help determine the level of coverage needed.

It is essential, says the Bureau, to make decisions about insurance coverage before the business is interrupted. Other resources can include others in the business, insurance representatives, reviewing accounts to consider the effect of an interruption, and thoroughly reading and understanding the policies.

How is BII Calculated?

The premiums that a business owner will pay for interruption insurance depend on the coverage of the policy as well as the likelihood that a loss will occur, according to the Insurance Bureau of Canada. Insurers will take into account the type of business and the degree of risk management the business has in place, along with other factors, when calculating premiums for interruption insurance.

Insurance companies are like any other business, they compete on price and the quality of their product. It is important for business owners to compare insurance products to find the best fit for their company, says the Bureau.

Does Insurance Cover COVID-19 Closures?

Unfortunately, many Canadian business owners are facing extended closures due to ongoing COVID-19 restrictions. Many are relying on their BII policies to keep their enterprise afloat in the meantime; however, many business owners report having their claims denied.

The coronavirus pandemic is an unprecedented situation. The restrictions enacted to slow the spread of the disease were wholly unexpected among business owners. Most BII policies cover losses of revenue or increased expenses due to physical damage to business property.

Insurers say that they meant for business interruption policies to cover more clear-cut situations, for example, if a business building is damaged in a windstorm. Many insurers argue that closures due to COVID-19 restrictions do not qualify as “physical damage” to the business.

However, Canadian courts have found that BII coverage may be broader, covering loss of use of business property due to an unexpected event. The courts have yet to consider denied business interruption policy claims due to COVID-19 restrictions. Experts say that it may be an uphill battle, but the courts may allow business owners to make claims based on more than simple property damage.

What If Your BII Claim is Denied?

Indeed, a number of business owners report that their insurance claims in the wake of the coronavirus pandemic were “wrongfully” denied. The first step in fighting a denied claim is to review the insurance policy.

In fact, many business interruption insurance policies carry pandemic clauses, say experts. Reportedly, policies that are sold to doctors, lawyers, accountants, and dentists often cover losses in the event of a pandemic.

In addition, while a policy may not name pandemics specifically, experts say that coverage can also include supply chain interruptions. Supply chain interruptions, as businesses that supply other businesses experience extended shutdowns, have been an all to common result of the COVID-19 pandemic. If a business is experiencing loss due to supply issues, experts recommend business owners review their insurance policies to see if supply chain interruptions are covered.

Business Interruption Lawsuits Against Insurers 

If your insurance company denied your business interruption claim, you may have to take them to court.

Taking on legal action is daunting, especially for a business owner in the midst of a crisis due to an unexpected event. An experienced lawyer can help review the BII policy and fight for the compensation you deserve. 

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