If you suffer losses because your business is prevented from operating, the definition of a qualifying interruption under a business interruption policy can make a tremendous difference in your ability to receive compensation, so it’s vital to understand what your policy considers a bona fide interruption.
Although policies can vary widely, we discuss incidents that are often covered and those that may not be, as well as areas where disputes commonly arise.
What is Business Interruption Insurance?
Business interruption insurance covers losses that result when an unforeseeable event, such as a fire or natural disaster, disturbs a business’s ordinary operations.
Business interruption insurance may provide funds to cover:
- Reductions in business income
- Cost of continuing to pay operating expenses
- Meeting payroll
- Paying rent
- Expenses incurred to minimize the interruption, such as relocating or renting equipment
Business interruption coverage is often added to a commercial property insurance policy, but in some situations it can also be sold as a standalone policy.
Generally, it complements commercial property coverage because it provides resources to cover different expenses. Commercial property insurance covers the cost of repairing damage to business property, and business interruption insurance provides funds to offset losses caused by that damage.
What Does “Interruption” Mean in Business Interruption Insurance?
While many business interruption policies require a covered physical loss or damage before business income coverage applies, a qualifying interruption that triggers coverage could be defined in many different ways. The policy terms determine what counts as an eligible interruption and what doesn’t.
A business interruption policy may recognize several types of situations as qualifying for coverage, but generally, coverage will not apply simply because an incident reduced income. The factor must usually meet some specific parameters established in the policy.
The interruption may involve a complete shutdown of business, but a reduction in operations might also qualify. Often, coverage is triggered by an event that prevents the business owner from accessing the premises or prevents the business from operating normally. Understanding what the policy language covers and what it excludes is vital because there is no standard definition.
What Types of Events May Be Covered as a Business Interruption?
A business interruption policy may cover losses triggered by a variety of events, but you should read the policy details closely because certain events may be specifically excluded.
Fire and Smoke Damage
If a fire or explosion damages the building where a business is located, it often forces the business to close for a substantial period. When it reopens, it may be able to operate only at reduced capacity.
Smoke often causes far more damage than people expect. Smoke damage from fires in adjacent areas or even separate buildings can interrupt a business.
Water Damage
Even businesses not near a flood zone can be damaged by water from burst pipes, failed sprinkler systems, fire response, leaking air conditioners, and other sources. Some water events may be ineligible for coverage or may require a separate rider. Business interruption coverage usually cannot be added to standard traditional flood insurance policies, but some private flood insurance policies may cover loss of revenue caused by flooding.
Damage from Hurricanes and Other Storms
Throughout Florida, the risk of business interruption from hurricane and windstorm damage is a year-long threat. However, some policies may exclude losses caused by damage from certain types of storms, so it is critical to read the fine print.
Other Building or Equipment Damage
If essential equipment isn’t functioning or facilities are damaged in other unexpected ways, a business interruption policy may also cover losses from these problems.
What Happens When the Insurance Company Doesn’t Accept Your Interruption?
Insurance companies often deny business interruption claims for a variety of reasons, whether legitimate or not. The company may claim that:
- There was minimal damage
- The type of damage was not covered
- The business income loss was not directly caused by the damage
- Business interruption was minimal
- Exclusions apply to prevent coverage
- The interruption did not last as long as claimed
- Losses are not supported by financial documentation
When a policyholder and insurer disagree on a claim, it can help to consult an insurance attorney who can explain to the insurer why the claimed losses should be covered.
FAQs About Business Interruption Coverage
Does a business have to be completely closed to have an “interruption?”
While a policy may require complete closure before losses can be reimbursed, incidents that reduce business can generally be covered even if the business can operate on a limited basis.
Can you prove business interruption by showing that revenues have decreased?
No, you usually must provide evidence of property damage or other qualifying incident that caused the decrease in revenue. To have that loss covered, you must present evidence showing how the damage led to a decrease in revenue.
How do you document a business interruption insurance claim?
To document a business interruption insurance claim, it is helpful to present:
- Financial records such as profit and loss statements for the two years prior to the start of the interruption
- Photos and other documentation of the damage causing the interruption, including the date and time of the onset
- Financial records showing income and disbursements during the disruption window
- Employee payroll records
- Records of ongoing expenses such as rent
- Receipts for emergency repairs
- Invoices for equipment rentals, relocation expenses, and other costs of modifications made to continue operations and mitigate losses
An insurance attorney can help you document the claim, so you receive the full amount owed under your policy.
Ver Ploeg & Marino Works to Resolve Business Interruption Claims
When a business owner has the foresight to purchase business interruption coverage, it is very frustrating to see the insurance company deny a claim or refuse to cover all the losses. Unfortunately, it happens frequently.
You may be able to prevent problems by thoroughly documenting your claim. However, if a claim is denied inappropriately and an internal appeal fails, then the insurance company could be held accountable in court.
At Ver Ploeg & Marino, we have helped policyholders resolve disputes with their insurance companies for decades, and we know there may be several options that can lead to favorable results. To discuss your rights and options in your particular situation, schedule a consultation with our experienced team today.
