Business Interruption Insurance: 8 Terms to Help You Understand What is Covered
Most commercial property insurance policies provide coverage for business income loss by adding an endorsement to the insured’s property policy. This endorsement is designed to protect the insured for losses of business income it sustains as a result of direct loss, damage, or destruction to insured property by a covered peril. Although many such clauses are in use today, a typical business income insurance clause reads as follows:
We will pay for the actual loss of business income you sustain due to the necessary suspension of your “operations” during the period of “restoration.” The suspension must be caused by the direct physical loss, damage, or destruction to property. The loss or damage must be caused by or result from a covered cause of loss.
In order to better understand business income insurance let’s explore the three terms highlighted above:
- Actual loss sustained: Business income coverage covers the actual loss sustained by the insured as a result of direct physical loss or damage to the insured’s property by a peril not otherwise excluded from the policy.
In addition to coverage for business income, the business income endorsement of the property policy can provide other coverages, know as “additional coverages.” An example of an “additional coverage” is extra expense, which is detailed below.
Extra expense is defined as the necessary expense incurred by the insured during the period of restoration that it would not have been subjected to if there had been no physical loss to real or personal property caused by a covered peril.
Note that when a business income loss occurs, the insured is obligated to take reasonable steps to try to avert or minimize such loss: Any expenses incurred to reduce the loss are covered as part of the business income loss. The insurer will typically limit such expenses to the point that such expenses reduce the business income claim. In other words, the insurer will not pay any part of the expense that is more than the claim itself.
For example, the insurer will reimburse the insured $100 to reduce the claim by $200; but the insurer will not reimburse the insured $100 if the claim is only reduced by $50. Any additional expenses above this that are incurred to continue the business may be recoverable under an extra expense provision in the insurance policy.
Additionally, the business income endorsement section of property policies can include “extensions of coverage,” wherein the insured’s policy will insure against business income losses resulting from a variety of causes, including the following. (Note a sublimit typically applies for these optional, additional coverages.)
- Service interruption provides coverage for an insured for direct physical loss, damage, or destruction to electrical, steam, gas, water, sewer, telephone, or any other utility or service including transmission lines and related plants, substations, and equipment of suppliers of such services.
- Limitations regarding distances (such as where the actual loss occurs to the utility’s property in relation to the insured’s premises where the business income loss occurs).
- Exclusion for certain perils such as earthquake.
- Exclusions for overhead transmission and distribution lines.
As illustrated by the various coverage options discussed, there are many considerations that businesses must weigh when purchasing business interruption coverage. In fact, the above are basic coverages; additional coverage options exist and can be customized based on an individual company’s needs. To learn more about business interruption, or to discuss the coverages that would be most appropriate for your organization, please contact your local Marsh representative.
Business Interruption Insurance: 8 Terms to Help You Understand What is Covered, business income protection insurance.