On Sunday, August 28, 2005, business owners in New Orleans closed up shop for the day, unaware they’d be closing for a very long time. And some, forever.
Unfortunately for them, many of these small businesses were missing an extremely important part of their commercial insurance – business interruption coverage.
Unexpected circumstances – such as hurricanes like Katrina – can close businesses for an undetermined amount of time. Unlike employees of a large company, business owners don’t have workers’ compensation or sick leave to tide them over during a long closure. But there is an “equivalent” for businesses: Business interruption (B.I.) insurance. Here are several common situations that are covered by B.I. insurance:
- Fire: Even if only a part of your business’s building is damaged, you may have to close for a while for restoration.
- Windstorm: When your roof or your siding is torn off your building in a storm, it’s no laughing matter. New roofing or siding is costly. And, without a roof over your customers’ heads, the risk of a liability claims greatly increases.
- Hail: That outdoor patio may be romantic, but not in a hail storm. Restaurants welcoming guests to open-air dining have issues of liability and cleanup, both of which can be time-consuming and costly.
- Vandalism: Whether it’s graffiti or broken windows, you still may have to close down for cleanup.
- Damage to equipment: Machinery does break. Depending on your type of business, this could totally shut you down. Repairs may take a long time, and, of course, they’re costly.
If your business closes from a covered loss, you will be reimbursed for revenue you would have earned if you had remained open. Insurers use financial records to determine the compensation you’ll receive, so be sure to keep them up to date and accurate. Fixed expenses, such as rent or utility bills, don’t stop just because your company had to close. On average, 23 percent of a business’s revenue goes towards operating expenses, and these are covered by B.I. insurance while you’re closed.
Coverage amount: The amount of coverage is business-specific and depends on revenue, monthly expenses, and risk. Consider the following:
- How much will your bills be if you shut down for three days. What about three weeks? Three months?
- Do you do business in an area at risk from floods, tornados, hurricanes, or wildfires?
- What is the average recovery time for businesses dealing with the same risks you face?
- Do you want to continue to pay your employees while business is interrupted?
- Do you have enough in the bank to get through a long closure?
Cost: Cost varies all the way from $750 to $10,000, depending on the size of the business and coverage needed. Businesses in high-risk tornado zones or coastal areas will likely pay more. Business type plays into risk, too – restaurants may pay higher premiums than a shoe repair store due to higher fire risks.
Regardless of premium cost, B.I. insurance is much cheaper than what you stand to lose without it.