Loss of Business Income Insurance: How It Works, Costs, Benefits, and More

When choosing insurance for your business, you likely considered the need for property insurance. And you probably remembered that liability insurance is important too.

But, what if a catastrophe hits and you're left unable to operate your business for weeks, or even months?

A situation like this could be financially devastating for a small business.

This is where loss of business income insurance comes in. Learn how it works and how it can benefit your business. 

What Is Business Income Loss Insurance?

Business loss of income insurance — also known as interruption insurance — can help cover lost income when a business’s property is damaged by perils covered in the policy and the company is unable to operate.

Such perils may include:

• Fire
• Theft
• Wind
• Falling objects; or
• Lightning 

Loss of business income insurance may be included in a business owner’s policy or may be available by adding an endorsement or rider to the policy.

How Does Business Income Insurance Work?

To fully understand how business income insurance works, you need to know these key terms: 

• Business income: Any income that would result from typical business activity is considered business income. 
• Actual loss sustained: The monetary payment from the insurance company that covers the actual loss of income to your business.
• Period of restoration: The amount of time your business cannot operate after a loss is considered a restoration period.
• Extra expense: Any expenses related to a temporary move, such as inventory replacement, expedited shipping costs, etc.
• Waiting period: A set amount of time that must pass following an insured cause of loss before the business interruption coverage begins is your waiting period.
• Service interruption or contingent business interruption (CBI): The interruption of your operations or shutting down of your business due to property losses or power outages caused by damage to the utility company’s property is considered CBI.
• Interruption by civil authority: Civil authorities may order evacuation when disaster strikes, causing your business to shut down. Some policies will cover lost income when your business is interrupted by military or civil authorities. 

Loss of business income insurance lasts until the end of the business interruption period which is determined by the insurance policy. Standard policies are 30 days, however, adding an endorsement or rider can extend the policy to 360 days. 

In most cases, interruption insurance policies define the coverage period as the date that the covered peril occurred lasting until the damage to the property is returned to the condition it was in before the damage occurred.

Does All Business Insurance Cover Loss of Income?

Many business insurance policies include general liability coverage, business property coverage, and loss of business income insurance.

However, it’s important to check with your insurance provider, as interruption insurance may not be included in a basic policy and needs to be added by endorsement.

No single policy will protect against all potential risks. You should always shop around to find a policy that suits your specific business needs and budget.

What’s Covered by Loss of Business Income Insurance?

Lost Revenue

The insurance company will review prior financial records to determine reimbursement for profits that would have otherwise been made had the business not suffered a loss.

Keeping your records stored offsite or in the cloud is a good idea. This ensures that you have easy access to any information the insurance company is requesting.

Fixed Costs

Monthly expenses — such as loans, rent, or mortgage payments — must still be made. Business interruption insurance helps business owners make these payments even when income is not being generated.

Any additional fixed expenses, such as business licenses, will also be covered as a part of the insurance.

Loss of business income insurance may also provide reimbursement for reasonable expenses (beyond the fixed costs) that allow the business to continue operating.

Temporary Relocation Costs

Some policies include coverage for costs associated with moving to and operating your business from a temporary location. 

Payroll

Payroll coverage is essential to not losing employees during a shutdown. Loss of business income insurance can help a business owner pay employee wages even when the business cannot operate.

Taxes

Business owners must pay taxes, even if disaster strikes. Tax coverage helps business owners pay taxes on time and avoid penalties or interest.

Commission and Training Cost

In the event of a business interruption, owners often have to replace equipment and machinery and retrain employees on how to use the new equipment. Business interruption insurance might cover these costs.

How Much Does Loss of Business Income Insurance Cost?

Various factors may affect your premium. The insurer will use a risk assessment to determine your premium amount, which will take into account:

• Coverage amount: Usually this will be based on your projected income for the next 12 months plus the length of time it will take to repair damages and reopen your business. 
• Number of employees: More employees means more wages to cover in the event of a business closure. Your premiums will be higher the more employees you have.
• Type of business: A restaurant faces a higher risk of fire than a retail clothing store and therefore will pay more in premiums.
• Location: An area known for high winds, storms, or wildfires will increase premiums versus a location with milder weather.
• Prior claims history: Rates increase if you’ve made loss of business income insurance claims in the past.

Does Loss of Business Income Insurance Have a Deductible?

Typically, loss of business income insurance does not come with monetary deductibles, but sometimes there is a time deductible. 

For example, your insurer may make you wait up to 72 hours after the covered loss occurs for coverage to begin. Other insurers do not have a waiting period and coverage will start immediately after covered property damage occurs.

What Is Not Covered by Loss of Business Income Insurance?

According to the Insurance Information Institute, loss of business income insurance does not cover:

• Broken items resulting from a covered event or loss (such as glass)
• Flood or earthquake damage, which is covered by a separate policy
• Undocumented income that’s not listed on your business’s financial records
• Utilities
• Pandemics, viruses, or communicable diseases (such as COVID-19)

Additionally, you may not be covered for closures from inoperable power lines, but adding an endorsement to your policy may help cover this. 

Who Needs Loss of Business Income Insurance? 

Nearly every small to mid-sized business can benefit from loss of business income insurance. However, it is of utmost importance to businesses that rely on a physical location or assets (like equipment or machinery) that could be affected by theft, wind, lightning, fire, and falling objects.

This includes businesses such as:

• Retail stores
• Fitness centers
• Dog groomers
• Printing shops
• Salons and spas
• Yoga studios
• Accounting firms
• Auto repair shops
• Etc. 

As mentioned, many business owner’s policies (BOPs) combine liability, property, and loss of business income insurance. When purchased as a package, it is generally less expensive than purchasing each type of insurance separately.

Companies with 100 or fewer employees and revenues of up to $5 million or less are good candidates for a BOP. However, some businesses, such as restaurants, present specific risks that are inherent in their industry and may need to purchase insurance separately.

In this case, endorsements or riders can be added to a property insurance policy to extend the coverage to loss of business income.

How Much Loss of Business Income Insurance Do You Need?

Every loss of business income insurance policy has a coverage limit. This means there is a maximum amount your provider will pay toward an interruption claim. 

Choosing sufficient coverage is essential because it’s up to the business owner to absorb any financial losses above the policy limit.

When choosing your policy coverage, ask yourself these questions:

• If disaster strikes, how long would it take to reopen your business?
• If needed, is there office or commercial space available for rent in your area?
• Have you updated your fire alarms and security systems lately?

You should also take a close look at your earnings for the past 12 months and your projected earnings for the next 12 months as a guideline for choosing the right amount of coverage. As your business grows, you may wish to increase your policy coverage.

Ideally, your loss of business income insurance covers the operating expenses and fixed costs of your business while repairs are being made.

How To Purchase Loss of Business Income Insurance

If you’re an existing business, the first thing you can do is check your existing BOP, if you have one, and see if it includes interruption insurance. If so, ensure that it has the type and amount of coverage needed for your specific business.

If you do not have loss of business income insurance included in your policy, then you will need an endorsement. 

If you’re shopping for a BOP for the first time, you have several options. You can:

1. Contact the provider directly: Small businesses with simple insurance needs can usually go directly to the provider. However, you should shop multiple providers, and many new business owners are already short on time, so this can be a hassle.
2. Shop with an online marketplace: It’s now easier than ever to shop online for insurance. Simply enter the required information about your business and receive quotes from a variety of providers. However, many online marketplaces favor certain insurance companies, which means you might not get all the options.
3. Use a broker: Brokers offer a personalized service. They’ll take the time to ascertain your needs by asking you questions about your business and then contact multiple providers and present you with the top quotes.

Determining your insurance needs upfront is critical. Once you know what you need, you can compare providers to get the appropriate loss of business income insurance coverage for your business.