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Why Businesses Need Both Property And Business Interruption Coverages

In What You Need To Know About Small Business on February 27, 2019 at 9:01 am

One of the most common problems for local economies is that a lot of its businesses fail to recover following a major disaster. The survivability of any business following an event often boils down to the coverage terms of their business insurance plans and the total limit.

There are flood and fire insurances that protect businesses when their assets are damaged by a specific eventuality. However, a supplementary business interruption insurance policy can help firms to stay afloat when there is no earning following a natural disaster.

The Difference Between Property Insurance and Business Interruption Insurance

To understand the difference between a business property insurance and a business interruption insurance coverage, here’s an example. Let’s assume there is a shop that gets damaged by a flood and business is temporarily halted. The property insurance (if it has flood cover) would pay for the damages incurred to the property or any business asset as a direct result of the flood. However, that’s often not enough. A community struck by flood takes months to recover, which means the shop will generate zero income till the time it’s operational again. A business interruption insurance covers the lost income and helps businesses to earn when they are temporarily closed. These coverages usually also pay for expenses, such as rent and utility bills that a business needs to pay even when it’s not operational.

Why You Need Both Property and Business Interruption Coverages

The combination of business property insurance and business interruption policy is what is truly needed to financially recover following a major natural disaster. One covers the damages and the other takes care of the income. Most customer-centric businesses such as shops and restaurants are highly susceptible to bankruptcy following a natural disaster. New businesses are especially vulnerable as they often lack the cash reserves to recover and resume business. This is exactly why most insurance experts advice business owners to get a business insurance quote for both property insurance as well as business interruption insurance.

How Is the Income Determined During Claims

One of the most common questions is how much money would be paid by the insurance company if a business is protected by business insurance coverage if something goes wrong. It’s usually the average reported income of the business in the last fiscal year.

How are the Premiums Calculated

Even though it offers a dynamically different coverage when compared to standard BOPs and property coverages, business interruption premium calculations are pretty straightforward. It’s determined by the limit of the coverage and the risk factors.

The limit would dictate the total amount of claim that a business is liable to get following a disaster. A certain amount is usually cleared every week until the total amount is reached. Most experts advice selecting a limit that would cover the cost of at least one month of complete shutdown.

Risks depend on the nature of the business and the location. For example, offices and shops in fire or flood prone areas are likely to come with steeper premiums than others.

Apart from risk and total limit, the ability of a business to function out of office is also taken into account. If a business can quickly recover or work from an offshore site, it can spell lower premium rates.

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