16 April 2024

Business Interruption Insurance Explained

Watson Goepel LLP


Founded in 1984, Watson Goepel LLP is a full-service, mid-sized law firm based in Vancouver B.C. With a focus on Business, Family, Indigenous, Litigation and Dispute Resolution, and Personal Injury Law, our membership in Lawyers Associated Worldwide (LAW) provides us with a truly global reach.
Business interruption and business income insurance are meant to protect against monetary losses when your business temporarily comes to a halt.
Canada Insurance
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What is business interruption insurance?

Business interruption and business income insurance are meant to protect against monetary losses when your business temporarily comes to a halt. This could be due to an emergency such as a fire or flood, and the coverage can include operating costs, moving expenses, and other expenses. The purpose is to offset the losses you incur during the emergency.

How long does business interruption insurance coverage last?

An "indemnity period" is the length of time after an incident in which you will receive the benefits from your insurance policy. If an emergency causes your business to shut down for 16 months, and your indemnity period is 12 months, you would only be covered for those first 12 months of the shutdown. Depending on your policy and coverage, an indemnity period can last anywhere from 12 to 36 months. This is an issue that your broker ought to review with you.

There are several different types of business interruption insurance. Five of the most common types are:

1. Gross Earnings Coverage

"Gross earnings" are all sources of income for your business before any deductions (such as taxes and payroll) take place. This includes wages, rental income, interest, and any general business income. To calculate gross earnings, subtract the cost of goods or services sold directly from your total revenue. Gross earning coverage protects this amount.

One pitfall with Gross Earnings coverage is that once the business can operate again this coverage ends, even if you are not yet earning your pre-incident revenue.

2. Gross Profits or "Extended Business Interruption" Coverage

Gross Profits coverage will insure your business' loss of income until you are operation and you have reached the level of income you were making before the incident, or until your policy limits are reached, or the indemnity period expires.

3. Actual Loss Coverage

Actual Loss coverage is meant to cover the practical losses you suffer because of an emergency. These can include coverage for things such as rent, mortgage payments, utility bills, property taxes, payroll, and other expenses. These policies are typically very similar to Gross Profits coverage but will not have a fixed policy limit.

When applying for Actual Loss coverage, you will be expected to have a detailed "business interruption worksheet" that sets out your business' expenses, income, and growth for the past several years, to demonstrate the anticipated expenses. It is very important that you keep this document up to date and that it meets any requirements your insurance broker or insurer has.

4. Contingent Business Interruption Coverage

Contingent Business Interruption Coverage is meant to protect your business if it must halt because another company has been impacted. For example, if a key supplier for your manufacturing business has suffered a fire and cannot produce the material which is essential to your business, this type of coverage can assist in preventing your loss. This coverage can protect against physical interruptions, such as fires or floods, but can also cover issues like security breaches or data losses.

5.Civil Authority Business Interruption Coverage

Civil Authority coverage is meant to protect your business in situations where a local or provincial government has issued an order prohibiting entry to your premises. This could occur in situations where a neighboring business suffered a fire, flood, or needs to be demolished, and until repairs are made to that building it is not safe to enter your business. Even though your business could operate, the government or other civil body has ruled it unsafe to do so.

Broker Duties

In conclusion, there are many different types of business interruption insurance, and the right policy for your business will depend on your needs and the risks associated with your company. It is important to speak to a qualified broker or other insurance specialist to determine what you need to make sure your business can withstand temporary stops in operations.

Watson Goepel experts can assist you in cases where the broker has failed to properly place this coverage.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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