Unexpected events like natural disasters, fires or vandalism can force businesses to close temporarily, leading to significant income loss. Business income insurance, often called business interruption insurance, protects against this risk by covering lost revenue and helping businesses meet essential expenses during downtime. It allows companies to maintain payroll, pay rent and cover other fixed costs while they work to restore normal operations.
What Is Business Income Insurance?
Updated: November 28, 2024
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Business Income Insurance Definition
Business income insurance compensates businesses for lost income during temporary closures caused by covered risks. It helps companies recover financially by replacing revenue lost when operations are disrupted. This insurance focuses on income and operating expenses, not physical assets.
This type of insurance typically covers income that would've been earned had the business remained open, along with operating expenses like rent, payroll and utility bills. It differs from other types of business insurance that primarily cover property damage or liability claims.
How Business Income Insurance Works
To initiate business interruption claims, businesses must document their income loss, usually through financial records showing revenue before the incident and projected revenue had the interruption not occurred. The insurer will then evaluate the claim to calculate the potential compensation based on historical revenue, operating costs and restoration duration.
Once the claim is approved, the business interruption coverage reimburses the insured for lost income and ongoing expenses that keep the business viable during recovery. Coverage continues until the business returns to its pre-disruption status or until the policy limits are reached, allowing the company to navigate the temporary shutdown without permanent financial damage.
What Does Business Income Insurance Cover?
Business income insurance coverage applies to various expenses and losses associated with operational interruptions, including:
Lost business income
It covers a business's income had it remained open. The amount is typically based on historical revenue and projected sales figures.
Operating expenses
It pays for essential expenses like payroll, rent and utility bills. By covering fixed costs, businesses can retain key staff and pay for basic operations until they reopen.
Relocation costs
If the business must temporarily relocate, business interruption insurance may cover the cost of setting up and operating at a new location. This includes rent, utilities and moving expenses, helping businesses maintain continuity.
Training costs for new equipment
Should the business require new equipment post-restoration, the business income coverage may pay for employee training expenses.
Loan payments
Many businesses rely on financing to sustain growth. Business income insurance can cover loan payments, protecting the business’s credit rating and financial health during shutdowns.
Business Income Coverage Exclusions
Business income insurance typically excludes the following:
Pandemics or viral outbreaks
Standard business interruption insurance policies generally don't cover losses due to pandemics, as they're often deemed uninsurable risks.
Undocumented income loss
To be allowed, claims must have supporting documentation of previous income, as insurers require verification of loss to determine compensation eligibility.
Voluntary closures
If a business closes voluntarily or due to personal reasons unrelated to insured incidents, the business income coverage doesn't apply.
Utility disruptions not caused by insured events
Losses due to power or water outages unrelated to insured property damage are typically excluded.
Delayed restoration beyond policy terms
Additional expenses incurred afterward may not be reimbursed if the restoration period exceeds the policy’s covered timeframe.
Types of Business Income Insurance
Businesses can choose from several types of business income insurance options, including:
- Standard business income insurance covers lost income when a business temporarily closes due to covered physical damage, such as fires, storms or other unforeseen events. It compensates for lost revenue and helps cover essential expenses like rent, payroll and utilities.
- Extended business income insurance continues coverage even after reopening, offering financial support until revenue returns to pre-closure levels. This helps businesses facing a gradual recovery period by protecting against income loss during the adjustment phase.
- Contingent business interruption insurance protects businesses that depend on third-party suppliers, vendors or partners. If an external party faces disruptions, like a factory fire or supply chain issue, this policy compensates for the resulting income loss.
- Extra expense coverage pays for additional costs to minimize downtime. Unlike standard income insurance, it covers urgent expenses, such as leasing temporary space, setting up alternative work sites or replacing damaged equipment.
- Utility services interruption coverage is a type of business loss insurance that protects businesses relying on essential utilities like electricity, water and gas. It compensates for lost income during service interruptions caused by insured events, such as severe storms or utility provider failures.
Who Needs Business Income Insurance?
Businesses of all sizes that depend on a steady income to cover operating costs can benefit from business income insurance. These include retail stores, restaurants, hotels and health care facilities that rely on daily transactions or appointments. A brief closure due to fire, storm damage or other disruptions can lead to significant income loss, making it hard to cover payroll, rent and utilities.
How Much Does Business Income Insurance Cost?
Business income insurance costs vary based on several factors, including the business’s industry, location and risk exposure. Insurers assess how susceptible a company is to certain risks, such as natural disasters, fire or theft, to determine premiums. For instance, a business in a high-risk area or with a claims history may face higher rates. At the same time, low-risk operations may have more affordable options.
Other factors include the business income coverage amount needed, revenue and specific policy terms. Businesses with higher incomes or requiring extensive coverage to protect complex operations might see higher costs. Also, the restoration time can impact pricing since longer periods increase the insurer’s potential payout.
How to Find the Right Business Income Coverage
To help you find the right business income coverage, follow the steps below.
- 1
Evaluate your business’s risk exposure
Assess the unique risks that could disrupt your operations, such as industry vulnerabilities, geographic location or reliance on critical suppliers.
- 2
Calculate essential coverage needs
Determine the income and critical expenses, like payroll, rent and utilities, that must be covered during a closure.
- 3
Compare policies and coverage limits
Look at options from top insurance providers, focusing on coverage limits, terms and additional benefits that could impact your business.
- 4
Understand exclusions and policy terms
Review each policy’s exclusions to understand what events or circumstances might not be covered, such as pandemics or inevitable utility failures.
- 5
Consult an insurance specialist
Working with an insurance specialist can provide insights into complex terms and help tailor coverage to fit your industry and operational needs. They can also guide you in choosing the best options and add-ons.
- 6
Consider add-ons for enhanced coverage
If your business faces unique risks, explore add-ons like extra expense coverage or utility interruption coverage. These options help broaden your coverage, offering extra financial security for costs standard policies might not cover.
FAQ: Business Income Insurance
What is business income insurance?
Business income insurance, also called business interruption insurance, is a type of coverage that compensates for income lost during forced closures due to covered incidents.
What does business income insurance cover?
Business income insurance coverage includes lost revenue, ongoing operating expenses and sometimes, extra costs to resume operations.
How long does business income insurance last?
Coverage lasts through the restoration period until the business resumes normal operations or reaches the policy’s time limit.
Is business income insurance required by law?
While not legally required, business income insurance coverage is highly recommended for companies susceptible to revenue loss from unforeseen closures.
About Mark Fitzpatrick
Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.