Business Interruption Insurance: What It Covers, What It Does Not

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Bobby L. Hickman is a longtime business and financial journalist who brings decades of experience in insurance and financial services to his editor role at Investopedia. He has worked with insurance and financial services companies, such as AFLAC, Allstate, Confederation Life, Farm Bureau, SunLife, and others. His editorial clients include the Atlanta Business Chronicle and Advisors magazine.

What Is Business Interruption Insurance?

Business interruption insurance is insurance coverage that replaces business income lost in a disaster, such as a fire or a natural catastrophe. Business interruption insurance is not sold as a separate policy but is either added to a property/casualty policy or included in a comprehensive package policy as an add-on endorsement or rider.

Key Takeaways

• Business interruption insurance is coverage that replaces income lost if a business is halted due to direct physical loss or damage, such as that caused by a fire or a natural disaster.
• Business interruption insurance includes business income, extra expense, contingent business interruption, or civil authority coverages.
• This type of insurance also covers operating expenses, moving to a temporary location , payroll, taxes, and loan payments.
• Standard business interruption insurance does not reimburse policy holders if the business is closed due to a pandemic. Even some all-risk insurance plans have specific exclusions for losses due to viruses or bacteria.

Understanding Business Interruption Insurance

Interuptions to business operations are considered the top threats to enterprises globally, according to a 2024 survey by financial multinational Allianz. Business interuption was cited as a major concern and risk by 31% of responders, trailing only cyber incidents (36%). Cyber attacks and the other top threat, natural catastrophes (26%), are also common causes of business disruptions,

Business interuption coverage (sometimes known as business income coverage) is one of several types of insurance designed to protect businesses against various types of risk. This type of coverage applies to a temporary disruption in operations over the duration of the business interruption period, which is specified in the insurance policy. According to the Insurance Information Institute, the standard policy period is 30 days, but using an endorsement can extend it to 360 days.

Most business interruption insurance policies define this period as lasting from the date that the covered peril began until the date that the damaged property is physically repaired and returned to the same condition that existed prior to the disaster. There may also be a waiting period of 48 to 72 hours.

Business interruption insurance premiums (or at least the additional cost of the rider) are tax-deductible as ordinary business expenses. This type of policy pays out only if the cause of the business income loss is covered in the underlying property/casualty policy. The amount payable is largely based on such factors as the past financial records of the business and the amount of coverage. Other factors include the type of industry, number of employees, and whether the location is subject to natural disaster risks (such as hurricanes or wildfires).

Time is of the essence when reporting business interruptions. Consider the importance of not only filing a prompt claim but providing prompt back-up to substantiate your claim quickly.

Types of Business Interruption Coverage

There are several types of business interruption insurance available which may include or exclude different types of claim items. The most common forms of business interruption coverage include:

• Business Income Coverage: This form of coverage assists in replacing lost income and paying ongoing expenses if your business is forced to close temporarily due to a covered loss. It can compensate for missed profits, payroll, rent, taxes, and other operating costs, as discussed below.
• Extra Expense Coverage: Extra expense coverage assists in covering the additional costs your company may incur to minimize or avoid a shutdown. This may include items such as renting temporary office space or equipment, paying non-exempt staff overtime, or covering the cost of temporary transportation or relocation.
• Contingent Business Interruption Coverage: This form of coverage protects your company from losses caused by a disruption in the operations of a supplier or other business partner on which your company relies. For example, if a fire prevents your supplier from delivering goods to your company, contingent business interruption coverage may help compensate for your lost income.
• Civil Authority Coverage:Civil authority coverage protects your firm from damages caused by government-mandated closures or other limitations that prevent it from operating. For example, if your firm is forced to close due to a mandatory evacuation order or a curfew issued by local authorities, civil authority coverage may be able to compensate you for your lost income.

As you review the lists below, consider how each type of expense may pertain to only a specific type of coverage or may only be included if that coverage is opted into.

What Business Interruption Insurance Covers

Most business interruption insurance covers the following items:

• Profits: Based on prior months' performance, a policy will provide reimbursement for profits that would have been earned had the event not occurred.
• Fixed costs: These can include operating expenses and other incurred costs of doing business.
• Temporary location: Some policies cover the costs involved with moving to and operating from a temporary business location.
• Commission and training cost: In the wake of a business interruption event, a company will often need to replace machinery and retrain personnel on how to use the new machinery. Business interruption insurance may cover these costs.
• Extra expenses: Business interruption insurance will provide reimbursement for reasonable expenses (beyond te fixed costs) that allow the business to continue operating while the business gets back on solid footing.
• Civil authority ingress/egress: A business interruption event may result in government-mandated closure of business premises that directly causes financial loss. Examples include government-issued curfews or street closures related to a covered event.
• Employee wages: Coverage of wages is essential if a business does not want to lose employees while it is shut down. This coverage can help a business owner make payroll when they cannot operate.
• Taxes: Businesses are still required to pay taxes, even when disaster hits. Tax coverage will ensure a business can pay its taxes on time and avoid penalties.
• Loan payments: Loan payments are often due monthly. Business Interruption coverage can help a business make those payments even when they are not generating income.

Business interruption insurance is not sold as a separate policy but a rider added to an existing insurance policy.

What Business Interruption Insurance Does Not Cover

According to the Insurance Information Institute , you will not be covered for:

• Broken items resulting from a covered event or loss (such as glass)
• Flood or earthquake damage, which are covered by a separate policy
• Undocumented income that’s not listed on your business’ financial records
• Utilities
• Pandemics, viruses, or communicable diseases (such as COVID-19)

Special Considerations

Note that the insurer is only obligated to pay if the insured actually sustained a loss as a result of the interruption. The amount that will be recouped by the business will not exceed the limit stated in the policy.

Business Interruption Insurance and Pandemics

Not surprisingly, what business interruption insurance does and does not cover came under particular scrutiny during the COVID-19 outbreak and the resulting business shutdowns and curtailments. The answer, unfortunately, is that for the most part policy holders are not covered. In recent years, the National Association of Insurance Commissioners stated, many insurers have restricted coverage for bacterial and virus outbreaks.

Some 25% of small businesses do not reopen following a disaster, according to FEMA.

"The standard business interruption policy only applies when the business sustains direct physical loss or damage, such as a fire," said James Lynch, FCAS MAAA, chief actuary and senior vice president of research and education of the Insurance Information Institute. "Business interruption can also apply when a nearby business sustains direct physical loss or damage and a civil authority like the government closes all businesses as a result."

Viruses don't actually break anything. As Michael Menapace, a partner at Wiggin and Dana and professor of insurance law at Quinnipiac University School of Law, told Jeff Dunsavage of the Insurance Information Institute: "The virus. [compared to a fire or broken windows from wind damage], leaves no visible imprint."

Even all-risk business interruption insurance has exclusions. Especially since the SARS outbreak of 2003, those exclusions have tended to include losses from viruses and communicable diseases, Dunsavage wrote.

How Does Interruption Insurance Work?

Business interruption insurance becomes effective when a covered event occurs. You can file a claim with your insurance company and provide evidence of the damages incurred. Your insurer will review your claim, especially in the light of whether the event is covered under your current business interruption coverage.

How Much Does Business Interruption Insurance Cost?

The cost of business interruption insurance varies depending on a number of factors including the size of your company, the industry in which you operate, and the coverage levels you choose. Other factors that can influence the cost of business interruption insurance include your company's location, revenue, and claims history.

Business interruption insurance can cost anywhere from a few hundred to several thousand dollars each year. However, the actual cost of your insurance will be determined by the specifics of your business and the coverage options you select.

What Triggers a Business Interruption Claim?

Business interruption coverage typically only activates when a direct physical property loss arising from a covered event occurs. You may only make financial claims if this event has caused damage to your physical location

Is Business Interruption Claims Subject To a Limit?

Yes; your coverage for business interruption coverage is often limited to an amount based on a certain amount of activity over a certain amount of time. For example, some coverage may restrict business interruption coverage to a 12-month financial period. In addition, there may be limits to the types of expenses that can be claimed or the types of revenue lost that may be claimed.

The Bottom Line

Business interruption insurance is intended to compensate your firm for lost income and additional expenses incurred as a result of an unexpected disruption in your business operations. However, certain situations and conditions may not be covered by your policy. Make sure you understand your the terms of your policy to avoid surprises on what may or may not be covered in case your business operations are interrupted.