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Even if you keep meticulous business records and follow all of the best business practices perfectly, certain circumstances outside of your control can wreak financial havoc on your small business. Business interruption insurance helps protect your business financially if you are forced to close due to an unforeseen problem that is covered by your insurance.
For example, let's say a bad storm causes a tree to fall on your building and you have to close for a week (or more) to make repairs. How will you make up for that lost business income?
Luckily, the best small business insurance plans include coverage for situations like these. Here's how to get business interruption insurance:
What is business interruption insurance?
Business interruption insurance helps replace lost business income if you are temporarily unable to operate your business due to a covered loss, such as fire or theft.
This type of coverage is sometimes called “business income coverage” and is usually included as part of a business owner's policy (BOP).
What does business interruption insurance cover?
Business interruption insurance pays for the operating costs of a business caused by a covered problem. Perils typically covered by business interruption insurance are theft, wind, fire, lightning and falling objects.
Eligible operating expenses include:
The revenue you would make if you were running your business, monthly mortgage, lease or rent payments for your business space, business loan payments, taxes, payroll, relocation costs if you need to move to a temporary location, and training costs for your employees to learn new equipment.
What does business interruption insurance not cover?
Business interruption insurance has many exclusions, including:
Damage from floods and earthquakes, both of which require separate insurance policies; Unrecorded income that is not shown in the financial records; Utility bills, as they are usually shut down when a business is undergoing repairs; Shutdowns due to epidemics; Damaged property, which is covered under commercial property insurance.
Who needs business interruption insurance?
Business interruption insurance is a good option for most small business owners, but it can be a crucial type of coverage for businesses that rely on physical locations (such as buildings) and assets (such as machinery and equipment) that can be affected by problems like fire, theft, wind, lightning, falling objects, etc. This includes businesses that:
Restaurants Retail Stores Salons & Spas Dog Groomers Yoga Studios
How much business interruption insurance do you need?
Typically, all business interruption insurance policies have a limit of coverage – the maximum amount that the insurer will pay for a business interruption claim. Any financial losses that exceed the limit of coverage will have to be borne by you, so choosing the right amount of coverage is important.
Consider the following factors:
How long will it take to reopen your business after a tragic problem like a fire? Is the security and fire alarms at your business premises up to date? How much will it cost to rent new office space in your area? Is the space readily available?
Consider your total income and income projections as a guideline for the appropriate amount of coverage. Your insurance should cover the operating expenses you incur while your business is being repaired.
How much does business interruption insurance cost?
The cost of business interruption insurance will be based on a variety of factors, including the type of industry, number of employees, and the amount of coverage you choose.
Costs also vary depending on where your business is located and your risk of claims.
According to Insureon, business interruption insurance can cost between $40 and $130 per month, or between $480 and $1,560 per year.
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Should I purchase business interruption insurance as part of my business owner’s insurance?
Ideal and affordable for small businesses, business owners insurance combines general liability insurance, commercial property insurance, and business interruption insurance into one policy.
General liability insurance covers a variety of potential claims against you, including bodily injury, property damage, advertising damage, copyright infringement, damage to reputation, etc. Commercial property insurance protects your business's physical assets, such as furniture, computers, supplies, inventory, tools, valuable documents and business records.
How affordable is business owners insurance? According to Insureon, it costs $53 per month on average. If you run a small business and are interested in purchasing all three types of coverage, BOP is worth considering.
According to the Insurance Information Institute, companies with 100 or fewer employees and up to about $5 million in revenue are good candidates for the BOP.
How long does business interruption insurance cover?
In most cases, there is a waiting period of 48-72 hours after a covered loss occurs before your business interruption insurance kicks in. Be sure to check your policy's “recovery period,” which is the period during which insurance will pay out for a covered loss.
The restoration period is usually up to 12 months. So if your business is damaged on April 1, you are entitled to business interruption benefits until April 1 of the following year. The restoration period starts at 30 days and can be extended up to a year if necessary.
Does business interruption insurance cover coronavirus?
The question of whether losses due to a pandemic should be covered by business interruption insurance is a contentious one: the insurance industry argues that business interruption due to a pandemic is generally not covered, but many companies have argued in court that the losses should be covered.
According to the COVID-19 Insurance Litigation Tracker from the University of Pennsylvania Carey Law School, there are about 2,300 lawsuits over commercial insurance coverage for COVID-19, many of which are from companies in the food service industry.
“Business interruption insurance only provides coverage if there is direct physical loss or damage,” says Robert Gordon, senior vice president of policy, research and international at the Property Casualty Insurance Association of America. “Pandemics do not cause direct physical loss or damage and are a largely uninsurable risk.”
“Most of the business losses resulting from COVID-19 are due to a sudden drop in demand for in-person commercial services that do not involve physical loss or damage to property,” he said.
Additionally, business interruption insurance policies may exclude communicable diseases.
“Most property/business interruption policies have communicable disease exclusions and also require actual physical loss or damage as a condition for coverage to apply,” Gordon says. “Even before COVID-19, pandemic coverage was only available in very limited circumstances, such as event cancellation coverage. Business interruption policies do not typically include pandemic coverage.”
“Prior to the pandemic, most business interruption insurance policies did not cover infectious disease or pandemic-related losses,” said Neil Aldridge, senior vice president of corporate affairs at the National Association of Mutual Insurance Companies. “Thousands of lawsuits are pending over coverage, but we believe the majority had clear policy language. Several lawsuits have already been resolved in insurers' favor, and we expect insurers will continue to prevail in court.”
“We expect many insurers to reassess their cover terms and clarify coverage as necessary,” Aldredge said. “The fact is, pandemic losses, as we've seen, are so large in scale that they are not an insurable event.”
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