Small business has been suffering tremendously in recent months. It started with shutdowns to slow the spread of coronavirus, and then many businesses on the heels of that suffered damages because of civil unrest in cities throughout the country.
Now, as these businesses try to regain their footing and get back on track, they’re looking at things like their business interruption insurance to see what coverage they have.
During this time, having an expert protecting the interest of small business in your corner is important. This is because a lot of businesses are finding their business interruption insurance isn’t offering coverage related to coronavirus.
Many businesses are relying on lawyers to go over their policies carefully and help them figure out if they legitimately have coverage or not.
Going into this difficult situation with some foundational understanding of business interruption insurance may prepare you for what’s next as a business owner.
One specific question you may have is whether or not your business interruption insurance will cover payroll, and below are some things to know about coverage in general, and whether or not it’s likely to cover specific things like payroll.
The Basics of Business Interruption Insurance
Most businesses have insurance to cover physical damage to their building when it’s associated with a fire or natural disaster. Many businesses also have business interruption insurance, which is intended to cover continuing expenses and lost income while a business is closed or while repairs are going on.
Around one-third of U.S. businesses have interruption coverage.
The idea behind business interruption insurance is that it helps you keep paying your bills during a covered interruption and that it also covers any potential profit you would have earned during that time.
There are big differences between policies and their coverage, however.
Most business interruption policies will cover losses for up to 12 months, while some provide coverage for 18 or 24 months.
In some policies, you have coverage up to a dollar amount, or you might have to pay co-insurance. Co-insurance represents a percentage of the costs.
The policy might payout for 30 to 90 days after reopening, as the business works to regain its activity that’s on par with pre-loss levels.
In most cases, business interruption coverage is part of a property insurance policy and it may be an add-on.
If you’re buying business interruption insurance, you need to base your level of coverage on your gross earnings and projections, which will help you estimate possible future profits. If the costs of your business interruption go beyond the coverage you have, you’ll have to pay the difference out-of-pocket.
The cost of business interruption insurance can depend on your industry, your amount of coverage, and how many employees you have.
Your location and your risk level are part of the cost too.
For example, someone who runs a business in a place that’s high-risk for wildfires may pay more for business interruption insurance.
What Are Common Exclusions to Business Interruption Insurance?
Sometimes understanding the exclusions of your insurance policies can be as important as knowing what is covered.
Things that your coverage will not include in most cases are:
- Undocumented income: You need to able to account for the income you’re asking for reimbursement for from your policy. You have to prove financial damage due to the interruption. Document everything and understand the type of proof your insurance company will want to see.
- Utilities: Since your utilities are usually shut off if your business location can’t be used, business interruption insurance won’t cover these costs.
- Partial closures: If you have limited access to your building, but access isn’t fully cut off, you’ll likely not have coverage for this through your business interruption policy.
- Damages Not Covered: There are certain circumstances where even if your business is closed, you won’t have coverage, including earthquake and flood damage, or if you voluntarily close your business.
- Closures from downed power lines: If you can’t access your business due to a downed powered line or a power outage, your business interruption insurance likely won’t kick in. Most of these policies require your business is shut down for a minimum of 72 hours before your benefits go into effect.
So what will business interruption insurance cover?
- Income you would have earned during normal operations during the time of your business closure
- Lease and rent payments
- Relocation expenses if you have to change locations temporarily
- Loan payments
- Business taxes
- Losses related to damage preventing you from accessing your building
Does Business Interruption Insurance Cover Payroll??
One option you have when buying business interruption insurance is whether you will insure ordinary payroll. If you do decide you will, you have to think about for how long. You also need to realize that your needs are going to change frequently, so you should reevaluate your business interruption coverage at least annually.
Ordinary payroll includes payroll itself, employee benefits, FICA tax, Medicare payments, workers’ compensation premiums, and union dues for employees who aren’t executives, department managers, or employees under contract. Those employees’ payroll is a necessary expense as far as coverage goes if there’s a catastrophic loss.
When looking at most business interruption policies, payroll costs are treated the same way as other costs that you incur after the covered incident, meaning they are reimbursed.
Most policies will cover the cost of up to one year of pay for every employee.
Finally, as an additional note, business insurance policies may not provide coverage for situations that aren’t related to property damage.
You may need to add an endorsement to cover business interruption exclusions.
You may have the opportunity to include a communicable disease rider that would provide coverage if you have to close because of infectious diseases.
The situation a lot of businesses are facing right now is a little unique in the fact that while they may not have coverage for communicable diseases, there may be coverage because the government-mandated shutdowns. That’s something that you may ultimately need to speak to a lawyer about.
