Business Interruption Insurance Claims
Whether a natural disaster, a global pandemic, a pipe break, or fire damages at a commercial property, these unexpected events and ensuing damages can result in lost rents or business interruption. While it is unreasonable to believe one can mitigate against disruptive events from occurring, potential loss of rents and business interruption is covered under most commercial insurance policies. Business interruption or loss of use coverage can be a lifeline for businesses facing unexpected setbacks due to covered loss. This time-element coverage and how it is applied could be the difference between shutting down or losing tenants in the aftermath of a loss.
Business interruption coverage is designed to compensate businesses for financial losses incurred due to a temporary halt in their operations caused by unforeseen events. These events can include natural disasters, fires, cyberattacks, or even government-issued shutdown orders, like those experienced during the COVID-19 pandemic. As long as the disruption to normal operations is caused by a covered loss, an insured usually has reasonable basis to submit a claim on their business interruption coverage. However, every policy is different and it is important to refer to the policy language in order to determine extent of coverage on a claim-by-claim basis.
The Financial Impact of Business Interruption
During the peak of the covid pandemic, it has been estimated that business continuity losses alone in the United States reached USD 1 trillion per month (Hartwig and Gordon 2020), with the total capital resources of the U.S. property-casualty insurance industry standing at approximately USD 744.9 billion during the first quarter of 2020 (Best 2020). While clearly not all of the interruption losses were covered, these statistics highlight the magnitude by which short interruptions in business can come at significant cost. Additionally, when logistical and supply-chain disruptions come into play, the recovery time necessary can contribute to additional, residual losses.
Per Insuranceopedia, time element coverage is insurance coverage for losses tied to a period of time. Most often related to businesses, it covers such elements as business interruption, profit loss, extra expenses, service interruption, soft costs, rental income, and more. Moreover, additional living expense coverage represents a form of time element coverage found in homeowners’ policies.
Business interruption insurance is considered a “time-element coverage” meaning it is intended to cover the time it takes for your business to return to its pre-disruption state. This can include the period needed for physical repairs, replacement of inventory, and rebuilding customer trust. Additionally, most policies will place limits on both the time to bring the claim following a loss, as well as the maximum amount of time they will pay the costs associated with a disruption. For example, a policy may stipulate that an insured has one year from the date of loss to bring a claim for business interruption, and the carrier will only assume associated costs for a period of 12 months.
What is Covered Under Business Interruption
Your policy will specify what is and is not considered in a business interruption claim but here are some examples of what is typically covered;
- Lost revenue - based on prior financial records
- Mortgage, rent and lease payments
- Employee payroll
- Taxes and loan payments - due during the covered period
- Relocation costs - if the business must move to a new or temporary location due to physical damage to the business premises (may be considered as Extra Expense see below.