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How Does Business Interruption Insurance work?

Frustrated manager sitting at table in closed cafe, small business lockdown due to coronavirus.

For every type of insurance, there are countless subsets and optional additions. The scope of coverage for all of the various types of insurance can be dense, difficult to navigate, and hard to value. Businesses typically have property or casualty insurance as well as general liability insurance, and many business owners understand they have the added option of obtaining business interruption insurance. What exactly is business interruption insurance, and how does it differ from other types of property insurance? Read on to learn about business interruption insurance, and reach out to an Indianapolis business law and insurance coverage attorney with any questions.

What is Business Interruption Insurance?

Business interruption insurance is meant to protect businesses in the event their operations are shut down due to a natural disaster or other incident. Business interruption insurance is not sold as a separate policy but is instead a supplemental addition to either property/casualty insurance policies or comprehensive liability coverage.

Typically, business interruption insurance kicks in when a disaster such as a fire, earthquake, or flood damages the physical premises on which the company’s business is conducted, forcing the business to shut down while necessary repairs take place. While general property/casualty insurance covers the cost of the repairs and the cost to replace inventory and other damaged items, the company may suffer significant losses if it is forced to shutter its doors for weeks or months while the property is being repaired and inventory replaced. Business interruption insurance covers the income lost while the company is closed to the public and employees, preventing the company from earning a profit.

What Benefits Does Business Interruption Insurance Pay?

Business interruption insurance typically reimburses the policyholder for a reasonable estimate of income lost while the policyholder is forced to remain closed as a result of a direct physical loss. The policy might also cover other expenses generated as a result of the business interruption, including operating expenses, moving to and setting up shop in a temporary location, payroll, taxes, and even loan payments.

What Are the Limitations of Business Interruption Coverage?

Business interruption insurance is a subset of property insurance. As such, policies generally limit coverage to business interruption caused by a “direct physical loss” to the insured property. A direct physical loss might be caused by a natural disaster such as an earthquake or flood, or by an intentional act such as arson. Insurance coverage may also kick in if a business is forced to close due to damage to a neighboring building, such as if a flood weakened the foundation of the insured property’s next-door neighbor, putting it at risk of damaging the insured property and injuring occupants. In such cases, if a governmental authority shuts down the insured property for safety reasons, business interruption insurance can cover lost income and other associated losses. The policy might also apply in other mandated governmental closure periods, such as if the government shuts down the street on which the property operates for some event.

Business interruption insurance is not meant to cover business interruptions caused by things other than physical loss to the property. There have been a number of cases addressing, for example, whether closures (even closures mandated by governmental authorities) connected to the COVID-19 pandemic trigger business interruption coverage.

Moreover, the insurance policy may only cover lost income for a certain period and might not kick in until a minimum amount of time has passed (such as 48 or 72 hours of closure). Most business interruption insurance policies will cover the period from when the covered hazard arose until the date the damaged property is physically repaired to the state it existed before the disaster.

If you’ve been the victim of insurer bad faith in Indiana, or if you are an insured or insurer facing a dispute over proper insurance coverage, speak with an experienced and thorough Indianapolis insurance coverage lawyer at Lee Cossell & Crowley for a consultation on your case.

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