If there is one thing the pandemic taught us, it's to expect the unexpected. The last two years have been difficult to navigate due to changing local and state health guidelines. For small business owners, business interruption can be the difference between a successful business and one that is nearing bankruptcy. It's important for business owners to understand how business interruption occurs and what options are available to protect against the consequences of interruption.
What Causes Business Interruption?
There are many different business interruption risks outside of a black-swan global pandemic. These events happen frequently and can often leave a business inoperable for months at a time. According to Dun & Bradstreet, some of the most common risks associated with business interruption include:
- Structure fires
- Water damage
- Loss of electricity or running water
- Equipment failure
- Supply chain disruption
- Crime or vandalism
- Natural disasters
Effective risk mitigation strategies are an important aspect of preventing these common risks. According to a global study conducted by Allianz, fires and explosions were responsible for 30% of business interruption claims in 2020. At the same time, cyberattacks were the most feared cause of business interruption, with 50% of respondents indicating their apprehension towards a cyberattack event.
Most of these common risks are avoidable. Implementing a strong risk mitigation strategy is paramount to mitigating your business’s exposure to business interruption.
Best Practices to Avoid Business Interruption
What are some of the best things you can do to avoid business interruption?
There are simple actions you can take to protect against certain hazards. Some of these include:
- Installing an effective sprinkler system to prevent fire damage
- Maintaining machinery to prevent loss of use
- Installing a security system to prevent vandalism and other crime
- Monitoring the credit history of suppliers and vendors to avoid financial distress
However, drafting a strong risk mitigation strategy is the best way to get started. A strong risk mitigation strategy involves identifying the greatest risks to your business operations and implementing preventative measures to protect against them. This way, your business will be equipped for the worst hazards that occur according to your geographic region and your operations.
Another measure you can implement is an IT disaster recovery plan. According to The Nonprofit Times, this plan documents the policies and procedures necessary to recover and protect business IT infrastructure. This plan can mitigate disruptions from file corruption, data loss and system failures. Make sure to routinely check and update this plan to ensure a smooth transition when it is needed.
In our increasingly digitized world, it's important to be prepared against cyberattacks. As remote work becomes a more popular choice of employment, the frequency of cyberattacks has increased and caused more and more instances of business interruption. It’s important for your organization to be up to date on cybersecurity best practices and to understand the risks associated with remote work.
Available Coverage Options
Business interruption is not completely avoidable. It’s important to understand the coverage options available to you as a business owner if you experience a business interruption event.
Typically, business interruption insurance is a standard part of a businessowners insurance policy (BOP). Most carriers will either have business interruption as a part of a package policy or included as an add-on. It's important to note that business interruption is not sold as a stand-alone insurance policy. Coverage will be limited to covered perils, and certain causes of business interruption, such as pandemics, may be excluded.
Business interruption insurance usually covers the following according to Investopedia:
- Profit: Reimbursement for profits that would have been earned had an event not occurred
- Fixed costs: Costs of doing business such as operating expenses
- Extra expenses: Reimbursement for variable expenses that will allow the business to continue operating on temporary basis
- Employee wages: Helps the business owner with payroll to retain employees
- Loan payments: Can help make payments even though the business is not generating income
Business interruption coverage premiums are tax-deductible as ordinary business expenses. Payout is determined by historical financial records of the business and is dependent on if the cause of the loss is covered in the underlying policy.
The coverage period for business interruption can vary greatly. The standard period is 30 days; however an endorsement can extend coverage up to 360 days. This period is normally defined as the date at which the covered peril began until the damage from the accident is repaired and restored to the condition it was at before.
Learn More About Business Interruption Insurance
Business interruption can be a devastating event for many business owners. However, implementing preventative measures and knowing the coverage options available to you can make a difference for the continued success of your business. Want to learn more? Contact a BNC insurance agent today to learn how you can protect your business from business interruption risk.