Most owners think of this when they purchase business liability insurance to protect them from accidents and disasters that may occur on their property. However, even liability insurance will not cover certain losses. In order to fill this gap in coverage, it may be wise for business owners to purchase business interruption insurance.
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Business, especially small business, is the backbone of our economy. Business owners should take every possible precaution to protect their profits from unfortunate circumstances, not only for their own benefit, but because it benefits society as a whole.
What is Business Interruption Insurance?
This specialized type of coverage provides benefits if a business is forced to close due to an unforeseen circumstance. In many cases it overlaps with other coverages, providing benefits that are not covered elsewhere. The main purpose of business interruption insurance is to cover loss of profit or income that is caused by a shutdown. This allows the business to continue its operations, without incurring massive amounts of debt, while the problems are remedied.
The following compensation may be paid to business owners with business interruption insurance:
1. Money to cover fixed business expenses
2. Money to replace lost revenues
3. Money to cover payroll/employee benefits
4. Money to rent a temporary location
Note that coverages can vary greatly. Check with your particular insurer to get a clearer picture of the compensation your business could receive.
How Does This Coverage Relate to Taxes?
In general, payments to cover lost revenue may be based on the prior years’ tax statement, since future profitability of a business can be difficult or impossible to predict. Because of this, business owners should be sure to keep a second copy of important tax and financial documents at an off property location. This insures that the documents will be available should the primary business location be severely damaged or destroyed.
Also, while the premiums paid for business interruption insurance may be tax deductible, benefits paid out under the policy are usually taxable, as business income.
Does Every Business Need This Type of Coverage?
This is dependent upon several factors. Entrepreneurs and other relatively small businesses may have particular need for business interruption coverage, since personal funds are often invested in these types of ventures. Because of this, entrepreneurs may suffer more extensive damage to their finances in the absence of this coverage.
In general, if a business has been profitable for at least a year, the coverage could be a good idea. Business owners should ask themselves what they would do to replace the income lost if an unfortunate situation caused an operational shutdown. Remember, bills and expenses would still have to be paid, even as profits become lower or nonexistent. Consider these examples:
- Hurricane/Tornado or other Act of Nature
Business owners might assume their property business insurance would cover everything in these cases. This is simply not true. The property insurance will cover just that: lost or damaged property. However, a business could easily go into debt just trying to cover it’s regular expenses in a time of disaster. This is why business interruption insurance is offered, to give owners added peace of mind that their business will not suffer irreparable harm cue to an event over which they have no control.
What if A Business Operates Solely Online?
Even if a business only operates over the Internet, there are still instances in which business interruption insurance coverage may be needed. While it is true that online businesses will not likely be destroyed by the same means brick and mortar businesses are, they are not impervious. Consider these factors:
- Natural disasters or fires could destroy the computer on which pertinent files are stored
- Malicious viruses
- Hacker attacks
- Electronics malfunctions
In any of these instances, a consultant or computer technician would likely need to be called in to restore operations. Not only could the owner get reimbursed for lost profits, the compensation could also pay for the services of the technician who solves the problem.
How Can This Type of Coverage Be Purchased?
In most cases this coverage is not purchased separately, but with a suite of other coverages from a business insurer. It is best to inquire with each particular insurer to find rates and coverage details, then make a comparison on which company offers the best coverage for a specific business.
Business owners should be aware that while business interruption insurance can be of great help when disasters occur, it is not a cure all. In order to ensure that a business can stay afloat financially in the event of an unfortunate occurrence, a plan must be in place beforehand. Measures should be taken to protect the assets of the business, such as its property, employees, and equipment. This includes purchasing all the other necessary insurance, such as property, liability, and workers’ compensation insurance.
Also, employees should be trained to take steps to avoid business interruptions before they occur. This includes having policies in place to require immediate back up of files, maintaining important records, and holding regular fire and emergency drills. The more planning is done ahead of time, the less potential harm a business will suffer when things don’t go as planned.