Understanding business interruption insurance?
Just last month, a fire raged through the 4000 block of Cambie Street in Vancouver, destroying four small businesses. Within 24 hours, another fire burned through a portion of a family-run sawmill in Lumby, BC. What do these two fires have in common? All the businesses involved currently have “GoFundMe” pages accepting donations that will help with immediate expenses including financial support for employees. Unfortunately, in the case of the sawmill, they didn’t have insurance coverage, but they are working hard to keep their staff employed and get the 70-year-old family business back up and running by Christmas. Relying on crowdfunding is probably not a good business strategy, so it is important to understanding business interruption insurance and what is and is not covered.
The folks on Cambie and in Lumby are hopeful that they will get back to business. Along with the hope, these stories are also sobering reminders of what’s at stake should an unexpected calamity strike your business. A crowd-funding campaign can be hit or miss and is often considered a “last resort” type of solution. According to research, 40 percent of businesses never reopen after a disaster. All the more reason to have safeguards in place like business interruption insurance, to protect your life’s work in the event of a slow-down or suspension of operations.
Addressing the elephant in the room; are Covid-19 losses?
Perhaps the biggest disrupter of business these days is the global Covid-19 pandemic, affecting thousands of small businesses in retail, tourism, hospitality, and other sectors all around BC. However, loss incurred due to a pandemic is not covered under business interruption insurance. This type of commercial insurance covers the policyholder in the event of physical loss or damage to their place of business. As many businesses in British Columbia closed during the first phase of the Covid-19 pandemic, their locations were closed to help reduce human transmission of a virus, not because their premises were damaged or had experienced physical loss. This exclusion could also apply to the possibility of physical areas (ventilation systems, production departments, etc.) within the business that may become contaminated Covid-19. This is why it’s critical for business owners to consult with their insurance providers, and go over the policy wording with their commercial insurance experts.
Pandemic-specific coverage
After the Ebola crisis, specialized coverage for medical catastrophe-related business interruption became available to hospitals for known diseases like bubonic plague, MERS, SARS, HIV, Ebola, and influenza. The creator of this specialized policy, Axis Healthcare made an example of a hospital in Dallas, Texas that experienced a US $23.3 million loss in direct revenue after admitting the first Ebola patient in the United States. Essentially, once word got out about that patient, in-patient stays and emergency room visits plummeted.
While specialty coverage for communicable and infectious disease business interruption became available for the healthcare industry and hospitality after the Ebola epidemic, business owners might be wondering if something has been created for the Covid-19 pandemic? There was only one policy that provided business interruption in the event of a pandemic: PathogenRX, which was a collaboration between Marsh Insurance, reinsurer, Munich Re, and epidemic risk-modeler, Metabiota. Apparently, nobody purchased it after its launch in mid-2018 and has since been suspended by Munich Re. Currently, Lloyd’s of London is working to develop low-limit parametric contingent business interruption coverage to protect businesses from COVID-19 and future pandemics.
Business interruption insurance: Designated perils and how your business is protected
Business interruption insurance generally comes into effect in the case of one of three circumstances:
- Physical damage to the premises that cause suspended operations;
- Damage to property that is covered by the insurance policy and prevents customers or employees from accessing the business; or
- The government closes an area due to property damage that is covered by the insurance policy and prevents the customers or employees from accessing the business.
If the loss in question stems from a covered peril like natural disasters, equipment damage and vandalism, your business interruption insurance policy will protect your business by covering income your business would have earned if operating normally. It can also help pay for expenses like employee wages, taxes, rent, loan payments, and relocation expenses.
With storm season upon us in British Columbia, now is a good time to plan ahead for potential perils that may disrupt your business. Reliance Commercial Insurance experts will help conduct an investigation and assessment of vulnerable areas your commercial enterprise may be exposed to if there’s a catastrophic or smaller localized event. Your policy will cover continuing expenses and lost profits.
We will help identify expenses and determine adequate coverage:
- Rents or mortgage payments
- Salaries, wages, and benefits
- Power, light, and heat
- Professional fees
- Interest on bank loans
- Taxes
- Insurance
Along with identifying the above expenses, we will also evaluate lost operations and revenue streams including fulfillment of current orders, brand damage and loss of customers, ability to rebuild or restart the business, and re-staffing and training.
Contingent business interruption insurance
Business interruption insurance is a crucial component of risk management programs, but it does not extend to disruptions to a third party. That’s where contingent business interruption insurance (CBI) comes in.
Unlike traditional business interruption insurance that compensates the policyholder for a loss resulting from damage to its own property, CBI lets businesses transfer the risk of certain losses to the property of a third party. CBI reimburses policyholders for lost profits and extra expenses resulting from an interruption of business at the premises of a customer, vendor, supplier, or other third party.
Business interruption coverage can differ significantly; it is important to understand the policy terms, such as exclusions, coverage limits, and waiting periods. Your Reliance Commercial Insurance expert is here to ensure your business is both adequately covered and comprehensibly prepared in the event of an interruption.
Resources:
Reliance Insurance: business interruption
Fire claims long-time family mill
Early morning fire destroys businesses in Vancouver
This insurance would have helped in Coronavirus Crisis but nobody bought it
Lloyd’s Labs cohorts focused on Covid-19 risks
