People buy insurance to protect just about everything these days. Businesses have a general liability policy to protect against injuries to third parties, home owners have policies to protect their homes against damage from tornados and other weather phenomenon and many people have insurance to protect against flood damage. Another type of insurance, and one that is getting much attention in the wake of Super Storm Sandy, is “business interruption insurance.” With Sandy shutting down many NYC area businesses for between seven and fourteen days, the loss of income can range from painful to outright bankruptcy. Luckily, those with business interruption insurance have (maybe) protected themselves against the severity of the loss. But what exactly is covered by business interruption insurance is not entirely clear to some people.
In general, business interruption insurance will cover a loss after any catastrophic event such as a hurricane, tornado, earthquake, ice blizzards, etc. Because each policy is different, it is crucial for policy holders to read and understand their policies and make sure (before the storm) that the policy covers what it should. Many business interruption policies will cover the salaries of key (but not all) employees, will cover rent for a temporary facility, will cover temporary equipment (laptops, copiers, etc.) and the actual loss of business income during the period where the business actually could not operate (even out of a temporary facility).
As with all insurance, it is critical for a business seeking to trigger coverage under a business interruption policy to report the loss as soon as possible. The sooner the loss is reported the sooner that the insurer can begin making payments to keep the business viable during the difficult recovery period. It is common for the policy to contain a waiting period, usually 48 – 72 hours, before coverage is triggered.
The amount of coverage provided, of course, varies from business to business. The amount is typically determined by the historical profits and losses of the business. To determine the amount of coverage you will likely need to work with your accountant at the application stage to gather and provide the insurance company with profit and loss records for the past few months or years. Once the amount of coverage is established, the next issue is the length of coverage. Most businesses can expect to have coverage for as long as necessary to resume their normal business operations. However, there is not an unlimited amount of coverage. While the coverage does vary from policy to policy, 1 year is probably the longest duration of coverage that the average business can expect.
In addition to standard business interruption insurance, there is something known as “contingent business interruption insurance.” Contingent business interruption insurance is triggered when a key supplier cannot support your business due to damage to the supplier. You may or may not have contingent business interruption insurance included in your policy so you need to review your policy and find out whether you have the coverage.
In reviewing your business interruption policy and determining whether there is coverage, it is important to understand what type of loss is covered. The policy most likely requires the loss to be covered by physical damage to the property where the business is located. So if your business cannot operate because it does not have electricity due to a transformer that exploded two miles away, there may be no coverage. If your business cannot operate because it was in an evacuation zone, but there was no actual damage to your business property, there may be no coverage. The policy may also exclude flood loss so if the building is damaged by flood, there may be no business loss coverage.
Businesses should consult with their attorneys in submitting their claims and carefully review any denial or rejection of the claim from the insurance company. If you have business interruption insurance and believe the loss should be covered, but it was rejected, you should immediately contact an insurance coverage attorney to review the rejection and the policy to determine whether you have any rights. Insurance companies can, and do, make mistakes and courts can, and do, overrule them.