Business interruption coverage applies under four conditions:
- The named insured organization must suffer an actual loss of business income for a certain period of time;
- The loss of income must result because the organization had to suspend operations;
- The suspension must result directly from loss of or damage to the organization's premises;
- The loss or damage must be caused by a factor the policy covers, such as fire, lightning, or windstorm.
To calculate the amount of the loss, the insurance company will look at the firm's most recent financial statements. It will separate costs into two categories:
- Fixed costs, such as debt payments, permits, and salaries;
- Costs directly tied to sales, such as the cost of producing goods not yet produced.
The amount of time the insurance company will pay for may not be the same as the actual length of the shutdown. The company will pay for business income lost during the "period of restoration." This period starts 72 hours after the damage occurs to the premises. It ends on the earlier of:
- The date the damaged property should be repaired, rebuilt or replaced with reasonable speed and similar quality, or
- The date when business resumes at a new permanent location.
The insurer will cover some of the business's costs to reduce the amount of lost income. However, the expenses must actually reduce the amount of the loss. For example, if the business can resume operations two months sooner by renting a building that carries a higher rent, the insurance will make up the difference between the old rent and the new. The insurer will not cover costs that exceed the amount of income the business would have lost.
Of all the insured losses resulting from the September 11 terrorist attacks, the largest share of the dollars were for business interruption. Business owners should discuss this important coverage with their insurance agents at 314-351-HALO (4256). The right coverage may be the difference between surviving and shutting down permanently.