Business Interruption Insurance
Business Interruption Insurance is not intended as a stand-alone policy form. Coverages are normally provided by way of endorsement to the property policy. The Fundamental aim of all business interruption insurance policies is to insure what the business would have done had the loss not occurred. Business Interruption Forms insure:
- Loss of Income (The net profit that is lost because of a partial or total interruption to the business) and
- Necessary continuing operating expenses.
The purpose of business interruption insurance is to cover the loss of financial income which the business will suffer as a result of a reduction in business operations that is a consequence of physical damage loss by an insured peril. Every business interruption policy is based on 2 essential components.
- Insurable Interest – In order to have an insurable interest, there must be the prospect of earning business income which would have been earned had the incident not occurred. If insurable interest does not exist, business interruption insurance is not needed.
- Time Element – Time is basic in that it must pass before a business can earn income. The time element is key in determining the need for business interruption insurance and is also one of the yardsticks in calculating the insurance coverage required and the amount of recoverable loss. If a company’s operations would be seriously affected by the destruction or damage of its operating assets, including its building facilities, because of the passing time, then business interruption insurance is needed.
Who requires business interruption insurance?
All businesses, both large and small require business interruption insurance. For example:
- A business that would lose many of its customers during a severe interruption and, therefore, would be unable to resume normal operations once the property has been repaired. The business would likely lose its customers to its competitors.
- A business that relies on one supplier for a critical part of its product. If the supplier’s plant were to be shut down by a serious fire, the business depending on that supplier might also be shut down. (Contingent Business Interruption)
- A manufacturer of a specialized component for a very limited market could be virtually shut down if one of its customers were shut down by a loss. If the manufacturer has only one costumer, and that customer was shut down by a loss, the manufacturer would have no one to sell to and therefore, would be out of business until it could find a new customer or product. (Contingent Business Interruption)
- An apartment building that is severely damaged by fire and several tenants must move as a result. Most, if not all of the operating expenses and overhead would continue even though the income would be substantially reduced. The owners of the apartment would face a reduced profit or loss.