What Is Business Interruption Insurance?

Now that so many businesses are closed or suffering big losses because of the coronavirus, many people are interested in how business interruption insurance works and whether it can offer some relief. This type of coverage can help a business continue to pay its bills while the business is closed (or income is down) because of a disaster. Here's more information about what business interruption insurance is, how it works and whether coronavirus claims are covered.

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What Does Business Interruption Insurance Cover?

Most businesses have insurance that covers physical damage to their building and property if, for example, their business is damaged by a fire or a natural disaster such as a windstorm, wildfire or a gas explosion. Some businesses also have business interruption insurance, which can cover lost income and continuing expenses while the business is closed or being repaired because of the disaster. Only about one-third of U.S. small businesses carry business interruption coverage, says Mark Friedlander, spokesman for the Insurance Information Institute.

"It pays your bills that continue during the interruption and any profit you would have earned. For most businesses, the most important (and biggest) thing is to continue to pay your expenses, like payroll," says Bill Wilson, an insurance consultant and author of the InsuranceCommentary.com blog and four books including "When Words Collide: Resolving Insurance Coverage and Claims Disputes."

The coverage limits vary by policy. "Each insurance contract is written differently," says Derek Ross, an independent insurance broker and president of Kulchin Ross Insurance Services in the Los Angeles area. A typical policy covers the business's losses while the premises are being rebuilt or restored to normal operations, for up to 12 months, and some can continue for up to 18 or 24 months, he says. Others cover up to a certain dollar limit or require you to pay co-insurance, which is a percentage of the costs. The policy may continue to make some payouts for 30 to 90 days after the business reopens, while the business slowly ramps up to its pre-loss level of sales activity, says Ross.

Who Can Get Business Interruption Coverage?

Business interruption coverage is generally added to the company's property insurance policy. "Business interruption coverage is typically tied to a physical retail location that serves customers," says Friedlander. Small businesses may get a business owners policy that includes property, liability and business interruption coverage. Some types of coverage can also be added as an endorsement to a homeowners insurance policy and geared to people who are self-employed and work out of a home-based office, he says.

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Are Losses From the Coronavirus Covered?

It depends on the language in the contract, but most policies specifically exclude losses from pandemics. "Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses simultaneously," says Friedlander. Insurers began adding pandemic and virus exclusions after the SARS outbreak in 2003, he says.

Many of the insurance agents Wilson has talked with believe that about 75% to 80% of their clients' business interruption policies have virus exclusions. Policies that don't specifically exclude viruses may be able to provide some coverage, but the rules can be complicated and the details are based on the contract language. "There's no downside to filing a claim," says Wilson. "In fact, to even possibly have coverage, most policies require the reporting of losses as soon as possible. That being the case, it's a good idea to have documentation of past finances and those during the shutdown."

What Should I Do if I Think My Business Might Qualify for a Claim?

Contact your insurance agent or company if you think you might qualify for a business interruption claim, even if you're not sure if you're eligible for a payout. Get a copy of your policy so you can see the details of the contract, the payout requirements and exclusions and how much coverage you have. Your agent or broker can help you file a claim and can also let you know about any other relief for policyholders, says Ross. "We don't have the ability to approve or decline a claim, but we do work as the client's advocate," he says. For example, many insurers are giving policyholders an extra 30, 60 or 90 days to pay their premiums without charging late fees or interest. Ross is also helping businesses adjust their coverage for changes to their income and expenses that could help them reduce future premiums.

If you do file a claim, it's important to gather evidence showing the loss of business income. "You want to document everything," says Ross. "I recommend developing a timeline. When did your business flow start to decline? When were you forced to close? Did you make any large purchases of inventory before then?" Itemize your income and expenses over that time period, and also find out how it compares to the same time period over the past two or three years.

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Keep the documentation even if the claim is denied. There are several lawsuits right now related to business interruption coverage for coronavirus losses, and a few states have proposed legislation to try to get coronavirus-related claims covered, even if they were excluded from the contract. That legislation is likely to face legal challenges and may take a while to be resolved. No matter what happens, it can be worthwhile to gather records showing your business losses caused by the coronavirus in case you do end up having a claim or qualify for another source of assistance.

Kimberly Lankford has been a financial journalist for more than 20 years. As the "Ask Kim" columnist at Kiplinger's Personal Finance Magazine and Kiplinger.com, she received hundreds of reader questions every month about insurance, taxes, retirement planning and other personal finance issues. Her financial articles have also appeared in the Washington Post, Boston Globe, Chicago Tribune, Bloomberg Wealth Manager, Military Officer magazine and many local newspapers.

She received the personal finance Best in Business Award from the Society of American Business Editors and Writers, and she has written three books: "Rescue Your Financial Life," "The Insurance Maze" and "Ask Kim for Money Smart Solutions." She also wrote the "Financial Field Manual: Kiplinger's Personal Finance Guide for Military Families," which has been reprinted in three editions and is distributed to servicemembers at military bases throughout the world. Kim has been featured as a financial expert on NBC's Today Show, CBS This Morning, CNN, CNBC, Fox News, National Public Radio, PBS and many local radio and TV stations. Her website is www.kimberlylankford.com.