One of the first steps to managing risk to your business is purchasing insurance to protect it. You will need a couple of policies to protect your assets, employees, and customers adequately. But before you think general liability and workers’ compensation policy should be enough to achieve this goal think again.
According to the Federal Emergency Management Administration (FEMA), 25% of affected businesses will permanently close when disaster strikes. Business interruption insurance is crucial coverage for small businesses that can be an essential lifeline when your operations get interrupted. If you need clarification on whether this type of protection is important for your company, here are seven reasons why it is.
1. Help With Lost Income
There are a host of reasons that entrepreneurs need business income insurance, but the primary benefit is protecting income after an unexpected loss. Events that lead to premises damage that halts your operations, like a tornado taking the roof off of your office building, take time to repair.
What happens to your ability to take care of customer orders, pay employees, and keep up with your usual business expenses? Do you have enough assets to cover this cost, including when first reopening? Unfortunately, many small businesses don’t have this level of financial resources available and will either take out loans to cover these costs or file for bankruptcy.
This coverage replaces your company’s lost net income during the restoration period after a covered event.
2. It Pays For More Than Lost Income
When your business gets suspended because of events beyond your control, like severe weather or fire, you may decide to relocate until the damage has been fixed temporarily. How will you pay for these costs in addition to rental or mortgage costs from your original workspace? Companies that don’t have this protection may not be able to reopen as a result.
3. Keep Employees and Creditors Paid
As a business owner, you know that your creditors will still expect payment regardless of whether you can operate. A business interruption policy ensures you can keep up on important costs associated with your operations, including equipment rental fees, loan payments, and more.
Thanks to this policy type, you also don’t have to worry about payroll for your employees during the restoration period. This is extremely beneficial because it means you can avoid having to lay off and then later cover the costs of rehiring and training new staff because of an unexpected event.
4. Have Peace of Mind
Insurance does more than simply pay for damage or financial loss; it provides peace of mind. Owners already have a long list of risks and liabilities to worry about. From property damage to negligence-based lawsuits and market volatility, it’s never been more important to have proper coverage to protect every aspect of one’s business.
Business income insurance provides additional peace of mind for entrepreneurs by ensuring that their income is protected when disaster strikes and suspends operations.
5. Avoid Permanent Closure
Your commercial property insurance will cover damage to your workspace, but it doesn’t replace your business income. So even with restoration being covered, could you reopen after usual expenses and lost income has piled up? For companies that don’t protect their earnings with interruption protection, it’s possible they still can’t reopen despite their premises being restored because they need a way to catch up on their creditor obligations.
Interruption coverage ensures you don’t find yourself drowning in past-due mortgage payments, credit card bills, and related operational costs, so you can get back to work quickly and avoid closing permanently.
6. Get Back to Normal Operations Faster
Once a covered loss occurs, and the restoration begins, you may realize that essential equipment and other property were also damaged in the process. These tools and materials are essential to getting your company up and running once any property damage has been fixed, but you may need the right insurance protections in place to be able to replace them. This means operational delays, taking on additional debt to afford a replacement and more.
Business interruption insurance helps you replace damaged equipment so you can be fully operational sooner than later, essentially protecting your future income too.
7. Adding Extra Coverages
Basic business interruption insurance generally won’t cover events involving government-ordered shutdowns, utility costs, and additional expenses outside of the restoration period, even though you may not be fully operational. Fortunately, there are riders available to add extra protection to your policy.
For example, a utility rider would help pay for losses related to operational outages caused by your gas, electricity, or water being out of service due to a covered event. In addition, in situations where a civil authority (a government agency) orders your business to close due to events beyond your control, like a building fire or natural disaster, you would be able to recoup some of your lost income during the period you’re closed.
A popular add-on included extra expense coverage to ensure your creditors and related operational costs are paid for during the restoration period. Reopening with your books in the green is a great feeling because you were able to meet your obligations while inoperable.
It’s important to remember that when a loss occurs, you have an obligation to prevent further damage from occurring. This means cooperating with your insurer to get damages repaired and ruined equipment replaced as soon as possible. Failing to do so could increase the expenses related to your claim In doing so, you may incur additional expenses. Business income insurance can help you meet this expectation and support the rebuilding process after disaster strikes.
Considerations When Purchasing an Income Protection Policy
Now that you understand why business interruption insurance is so important for your company, some considerations must be made before purchasing a policy. The first is understanding what exclusions the insurer might impose.
When COVID-19 forced a nationwide economic shutdown, many business owners were shocked to learn their income losses weren’t always protected despite being forced to close by civil authorities. You can also expect to find that losses caused by earthquakes, floods, and utility outages are only sometimes covered.
You also need to determine how long coverage can be extended once restorations have finished. It takes time to start generating income again in some industries, so ensure you understand when your new policy ends its benefit in a covered event.
Protect Your Business Income
Having a business income insurance policy as part of your larger coverage plan will ensure your livelihood has maximum protection when things go wrong. Whether a fire in a neighboring building causes smoke damage in your own workspace or severe weather causes significant structural damage, you will have peace of mind knowing your financial loss won’t force your doors to close forever.
For many companies, a business interruption policy proves to be an essential financial lifeline during times of uncertainty. If you still need to purchase this coverage, speak with a knowledgeable insurance representative about protecting your business income with one of these policies.