The COVID-19 pandemic is an excellent example of how business operations can come to a halt due to unforeseen events or circumstances. Many companies could not continue business as usual due to the lockdown restrictions.
As a result of the global lockdowns, many businesses lost their revenue streams almost overnight. Business sectors such as the hospitality and sports industries (that rely on customer engagement to make a profit) suffered the most.
This unexpected event is why businesses must have business interruption insurance cover to safeguard them against financial loss. But what is Business Interruption Insurance and what does it cover? Let’s find out.
What Is Business Interruption Insurance?
Business interruption, or BI insurance for short, is an insurance policy that covers businesses against loss of income due to undesirable events. The policy covers companies for the period in which it is not operational due to the damage caused by such an event.
A business owners policy (BOP) is an all-inclusive insurance cover that bundles commercial property insurance, general liability insurance, and business interruption insurance together. Thus business owners are encouraged to get BOP cover to safeguard their businesses against financial peril from various company components.
Business Interruption Cover
Business interruption cover assists businesses to get back to the financial trading position they were in before the undesired event occurs. The policy covers the income lost and the additional expenses incurred during the halt.
What Does Business Interruption Cover?
Business interruption insurance mainly covers the operational expenses that a business incurs during a halt of production. This type of business insurance is typically fully liable for fixed company costs and loss of income due to an unwanted event. This liability is subject to the bounds of the coverage limitation.
Some examples of these expenses include, but are not limited to:
- Payroll (Salaries and wages)
- Loan repayments to creditors
- Corporate taxes
- Rental or bond payments (including rates and levies)
- Travel costs for relocating to a temporary location
- Access to business property interruption
- Damage to property sustained by suppliers or distributors
What Does Business Interruption Not Cover?
It is important to note that business interruption insurance does not cover all costs incurred in case of a halt of operations. The policy exclusively covers expenses that arise from direct physical loss or damage.
The business interruption coverage a company receives is also subject to the items or events listed on the policy. Thus the range of coverage is highly dependent on the monthly insurance premium paid by the business.
Some business interruption insurance exclusions include:
- Loss of income not appearing on previous financial statements
- Water and electricity utilities (as they get disconnected during repairs)
- Communicable or transmissible diseases
- Structural damage due to natural disasters (commercial property insurance covers these costs)
- Broken equipment due to peril
Does Business Interruption Insurance Cover Pandemics?
Generally, most business insurers offer two types of business interruption insurance cover.
The first type is standard business interruption insurance, which requires physical damage or loss of structural property as the primary reason for the claim. The second type is an extension of the standard insurance, which includes loss of income due to infectious or contagious diseases.
Most businesses in South Africa take insurance under the former rather than the latter. As a result, many business interruption claims that cited COVID-19 as the peril got rejected by insurers.
Therefore businesses need to include the extension in their primary cover to safeguard themselves from outbreaks such as the COVID-19 pandemic. Without the extension, insurers will not pay for the loss of income caused by the outbreak.
However, many businesses saw their claims rejected since the interruption of their operations was due to the government lockdowns and not the disease itself.
Check the Fine Print
It is also worth noting that the extension cover is subject to the policy wording. Most policies have sectional restrictions that will only cover damages within a specific radius.
Meaning that businesses cannot claim for loss of income due to riots or protests in surrounding areas, although that may be where most of their customers or employees live.
How Does Business Interruption Insurance Work?
Business interruption insurance intends to put the business back on track. Therefore the business interruption insurance policy only covers expenses that will restore the business’ capacity, not increase it.
Business Interruption Insurance Claims
The first step of claiming business interruption insurance benefits is to identify the property damage caused by the peril. Then the cost to repair the property and maintain recurring expenses is calculated and compared to the maximum payout underwritten on the contract.
Business interruption insurance claims are subject to a set payout limitation. The coverage limitation depends on the business’ policy wording and agreement. If the costs needed to recover exceed the limit, the additional charges would be the company’s responsibility.
All business interruption insurance payouts are subject to a restoration period. The restoration, sometimes called the indemnity period, is the length of time businesses will need to restore their production outputs before the peril. The restoration period typically lasts for 12 months.
The insurer will be responsible for costs such as loss of revenue due to the peril and repair cost as long as they do not exceed the coverage limit. Business interruption insurance payouts generally have a 48 – 72 hour waiting period before they kick in.
Final Thoughts on Business Interruption Insurance
Business interruption insurance is crucial to the survival and continuation of a business during times of uncertainty. This is why business interruption insurance is often also referred to as business continuity insurance.
The policy safeguards businesses from incurring financial strain caused by physical damage to property or events that lead to theft, fire or water damage, and breakdown of critical equipment.
Although the policy may not cover all costs incurred due to the peril, the payout will generously offset the business’ financial responsibilities. It is worthy to note that business interruption insurance is to help the business return to the same trading position it was before the peril occurred.
Therefore businesses cannot use the payout to build new business channels unless they have to because of the damage sustained from the unexpected event.
Therefore, business owners are highly encouraged to have business interruption insurance in addition to general liability coverage to protect their businesses from unforeseen events such as the COVID-19 pandemic.