Business interruption insurance: Overview, definition, and example
What is business interruption insurance?
Business interruption insurance is a type of coverage that helps protect businesses from income loss in the event that operations are temporarily disrupted due to an unexpected event, such as a natural disaster, fire, or other major disruptions. This insurance typically covers the loss of revenue, fixed expenses like rent, and other operational costs while the business is unable to operate as usual.
In simpler terms, business interruption insurance acts as a financial safety net, helping businesses recover lost income if something unexpected forces them to close temporarily.
Why is business interruption insurance important?
Business interruption insurance is important because unexpected events that disrupt business operations can lead to significant financial losses. Without this insurance, a business may struggle to cover ongoing expenses or pay employees while it works to get back on track. This type of coverage provides crucial financial support, allowing businesses to continue operations during difficult times and helping them recover without the added stress of financial strain.
For SMB owners, business interruption insurance helps ensure that your business can weather disruptions, keeping operations stable and preventing long-term financial damage.
Understanding business interruption insurance through an example
Let’s say you run a small restaurant, and a fire breaks out, causing significant damage to your building. While the restaurant is being repaired, you cannot operate and therefore lose income. Business interruption insurance would step in to cover the revenue you would have earned during this time, as well as continuing expenses such as rent and utilities. This insurance allows your business to survive while repairs are made, so you don’t have to worry about paying bills or losing profits during the downtime.
Example of a business interruption insurance clause
Here’s an example of what a business interruption insurance clause might look like in a contract:
“The Company agrees to maintain business interruption insurance that will cover the loss of income, fixed operating expenses, and additional costs incurred during periods of business disruption caused by unforeseen events, such as natural disasters, fires, or other similar circumstances. The insurance will provide coverage for a period of [specify time frame] until the Company can resume normal operations.”
Conclusion
Business interruption insurance is essential for protecting your business from unexpected disruptions that can lead to financial hardship. By covering lost income and ongoing expenses, it ensures that your business can continue operating and recovering after a disaster or unforeseen event. For SMB owners, understanding and having this insurance in place provides peace of mind, knowing that your business can weather any unexpected storm and get back on its feet quickly.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.