Business interruption insurance
Business interruption insurance, also called business income insurance, helps replace the net income a business would have earned and pay continuing operating expenses when a covered physical loss slows or stops operations. Depending on the policy, it may also pay reasonable extra expenses such as temporary premises. Limits, exclusions, deductibles and restoration periods apply.
Also called: business income insurance, business interruption coverage, business income, extra expense coverage
Business interruption coverage pays for the time your business cannot operate, not for the repairs. Property coverage fixes the building or replaces the equipment; business income coverage replaces the profit you would have made and keeps paying expenses that continue during the shutdown, such as payroll, rent and loan payments. It generally responds only when a covered cause of loss, like a fire, causes the physical damage the policy requires, and the declarations page shows how much it pays and for how long.
How a business income claim adds up
Business income, in the ISO Business Income Coverage Form CP 00 30, means the net income (net profit or loss before income taxes) that would have been earned, plus continuing normal operating expenses, including payroll, according to the New York Department of Financial Services (opens in a new tab). Take an illustrative fire that closes a business for six months, under a policy with a $250,000 business income limit and a $10,000 deductible or waiting-period reduction.
Hover or tap a row to highlight it.
| Item | Amount |
|---|---|
| Lost net income that would have been earned | $80,000 |
| Continuing payroll | $90,000 |
| Continuing rent, utilities, taxes and loan payments | $30,000 |
| Reasonable extra expense for a temporary location | $20,000 |
| Covered loss before the reduction | $220,000 |
| Less deductible or waiting-period reduction | $10,000 |
| Potential insurance payment | $210,000 |
The business keeps the $10,000 reduction, plus any excluded or uninsured losses. The $210,000 stays under the $250,000 limit here, and the actual payment still depends on proof of loss, the covered cause of loss, the period of restoration, exclusions and any coinsurance condition. The figures are illustrative.
Coverage options and what each changes
A stated dollar limit caps the payment, and it should reflect projected net income plus continuing expenses for the expected restoration period. Actual loss sustained coverage pays the loss you really suffer during the covered period, often with a maximum number of months on the declarations page; a shorter period can cut off payment if recovery takes longer.
Extra expense pays reasonable added costs to avoid or shorten the shutdown, such as temporary premises, equipment rental, advertising or expedited work. It is included in ISO CP 00 30 but left out of CP 00 32, which covers business income alone, so a business on the narrower form may have less money for relocation or a faster reopening. Continuing payroll may be included, limited, or handled by a separate payroll period or endorsement.
A coinsurance percentage can require you to carry a stated share of expected business income, and underinsurance can reduce the claim. A waiting period or deductible delays or reduces the first payment, with the exact terms set by the policy. Premium moves with the limit, expected income, payroll, industry, location, covered causes of loss, deductible, coinsurance percentage, restoration period and added coverages, according to the California Department of Insurance (opens in a new tab).
Several related coverages fill specific gaps. Rental value, or loss of rents, pays a property owner for rent lost when covered damage makes the space unfit to occupy. Contingent business interruption can apply when covered damage at a supplier, customer or other dependent property interrupts your operations. Service interruption covers income lost when off-site utilities or services are damaged, and civil authority coverage can apply when a government order blocks access because of a covered cause of loss.
Where you see business interruption coverage
Business interruption is business coverage. You usually find it inside a business owner's policy, commercial property insurance or a commercial package policy, as a standalone business income policy, or as an endorsement for business income, extra expense, contingent business interruption, service interruption, civil authority or rental value, according to the NAIC (opens in a new tab). It is generally not part of personal auto, homeowners, condo, renters, life, health or pet policies, and a home-based business generally needs a business policy or endorsement for it.
On paper, it appears on the quote, binder, declarations page, policy forms, endorsements, renewal documents, certificates of property insurance and claim letters. The declarations page may show the business income limit, an actual-loss-sustained designation with a number of months, extra expense and rental value. A certificate of insurance showing these fields is informational and does not change the policy's terms, exclusions or conditions, according to the New York DFS certificate form (opens in a new tab). For where it fits among other coverages, see our guide to what insurance a small business needs.
Questions to ask an agent or insurer
- What exact event has to happen before business income coverage applies? This shows whether the policy requires direct physical loss or damage from a covered cause and which exclusions apply.
- What business income limit, coinsurance percentage, waiting period and restoration period are on my declarations page? Together they set the most you can collect, whether underinsurance can cut the payment, when payments start and how long they last.
- Does the coverage include continuing payroll and other fixed expenses, and for how long? The ISO definition includes payroll, but a policy can limit or change it.
- Is extra expense included, and would it pay for temporary premises, equipment rental, expedited repairs or relocation? Extra expense can decide whether you can fund a temporary operation and shorten the shutdown.
- Do I have coverage for loss of rents, contingent business interruption, service interruption, civil authority, flood or earthquake? Each addresses a different risk and may need its own limit, endorsement or policy.
Frequently asked questions
Four questions come up often.
Does business interruption insurance cover any reason my business closes?
No. Coverage generally requires a covered cause of loss and the property loss or damage the policy requires, according to the Connecticut Insurance Department (opens in a new tab). Pandemic-related closures are an example: coverage typically required direct physical damage, and virus-related losses may be excluded.
Does it cover a power outage?
A standard provision generally requires covered property damage. An off-site utility failure may need service interruption coverage or an endorsement, according to the Connecticut Insurance Department (opens in a new tab).
Is it required by law?
Not generally. California describes it as optional coverage bought as part of a commercial multi-peril policy, according to the California Department of Insurance (opens in a new tab), and in Connecticut and New York the policy's own contract terms set what it covers. A lease or lender agreement may ask for it, so check those documents.
What should I keep for a business income claim?
Policies commonly impose notice, cooperation, documentation and proof-of-loss duties, and missing a deadline or failing to support projected income can delay or reduce payment. Financial records that show what the business was earning before the loss are the basis for the claim, according to the NAIC (opens in a new tab).