How Canadian Self Employed People or Business Owners Can Cover Losses with Business Interruption Insurance

Most property insurance policies cover physical damage and losses in case natural disaster strikes and affect your business. This policy helps pay for replacing damaged equipment and property.

However, when it comes to covering your losses due to the company’s inability to operate as a result of property damage, you’ll need to get a business interruption insurance or sometimes referred to as business income insurance.

To know more about this policy, visit Save Corporation Tax.

What is Business Interruption Insurance?

A business interruption insurance policy covers the operating costs and lost income of a business when a disaster forces the company to shut down its operations temporarily. This policy covers situations such as vandalism, fire, and other natural disasters.

Since you cannot buy this policy on its own, it can be purchased in three ways. It can be an add on to an existing commercial property policy, part of a business owner’s policy or commercial package property.

What Business Interruption Insurance Can Cover

A standard business interruption insurance policy provides coverage for the following.

• Income — This refers to the revenue your business may have earned if the company did not close down for a certain period.
• Wages — This covers the employees’ salaries to keep the payroll going even if the business is not operating.
• Rent — Most leasing contracts require continuous payments even if the property cannot be used.
• Loans — Payment for loans does not stop when your business operation is temporarily closed. This policy can help cover the loan payments while you can’t earn income.
• Relocation — This pertains to the costs you will incur when you move your business to a temporary location.
• Taxes — Your company still needs to pay its taxes regardless if your business is open or not.

The policy may cover other operating expenses related to the disruption of your business operations.

Do You Need Business Interruption Insurance?

One way to protect your business is by purchasing business interruption insurance. This policy helps replace income lost and pay for operating expenses which are essential in keeping a business afloat.

However, majority of small businesses do not have business interruption insurance policy. Many owners tend to neglect the importance of this policy and assume that their commercial property insurance is enough to cover their losses in case an unfortunate scenario takes place.

While commercial property insurance may replace stolen or damaged property, it will not cover lost income and expenses. Businesses who have a physical location such as retail stores are heavily dependent on its location. Once the store closes, it means losing potential income and customers.

Meanwhile, online and home businesses may not be dependent on this but should still consider getting this policy. For example, if they are selling a product and the supplier’s warehouse was burned down, it means that their business is also affected by the situation and may lose income from it. If they have the proper type of business interruption policy set for this event, they may be able to claim the benefits.

How to Receive Reimbursement from Your Insurance Policy

In order to receive the payout for business interruption insurance, there must be evidence of physical damage of the property as a direct result of an insured situation. To determine the amount of loss incurred, the company must identify the potential earnings of the business if the damage did not occur.

The insurance provider will require statements of profit, loss, tax returns, and projected sales income. Hence, companies should keep all records to help properly identify the income loss. Ask a professional from Save Corporation Tax for more details about this.

What to Expect During the Claiming Process

Every business interruption insurance claim is different. However, it is heavily dependent on how your policy was drafted including the laws in your state. Here’s what to expect from the insurance company.

• An initial discussion. A representative from the insurance company will meet with you to discuss the claiming process of the policy. This includes investigating the scenario thoroughly so the company may provide immediate funding for emergency needs such as repairs preventing further damage or temporarily relocating your business so it can continue to operate.
• Request for documentation. The representative will require information to help resolve the situation particularly to provide compensation for your business. The insurance company will require detailed documents and records of your business expenses and income prior to the loss.

Additional documents will also be required such as, daily revenues, payroll, and other variable costs that may be stopped while the business is not yet operational. Therefore, you need to present your books which is why it is important to keep and maintain all records.

• Determine the business income loss. The representative will work with your accountant to identify the amount of income lost while your business is closed. In most cases, a third-party accountant is hired separately to back up the statements in your files and records. The accountant audits and comes up with the calculated business income loss.

What You Need to Present to Get a Claim

The duration of the claiming process depends on the availability of your records and documents as well as the gravity of the damage incurred. Therefore, you should always be prepared with proof of business income for at least a minimum of two years before the loss. Here are some of the important documents you need to provide.

1. Financial statements — This includes a balance sheet of your company’s profit and loss with a minimum of two years before the incident.
2. Sales — This record is also required with a minimum of two years prior to the loss if available.
3. Payroll — This record is required by law.
4. Contracts — This includes real property leases, major customer and supplier contracts, and other contracts that are important to the business.
5. Continuing expenses — This refers to any records or documentation pertaining to expenses incurred while the business operation is temporarily closed.
6. Background — In addition, the representative may request details about the business including how the monthly sales and profit affect the business. This information helps identify a specific period prior to the loss.
7. Other documents — This includes inventory records, business income tax returns, monthly sales summary, and other financial projections done prior to the loss.

What is Not Covered by Business Interruption Insurance Policy

Before purchasing a policy, it is important to identify what is not covered by the policy. Remember, that a business interruption insurance policy is designed to keep a business operational while it is recovering from an unfortunate event. Hence, these are the events not covered by the policy.

• Flood and earthquake — These natural disasters require a separate type of insurance such as flood or earthquake insurance.
• Direct property damage — This category falls under commercial property insurance since it covers your company’s assets and belongings.
• Liability — Business interruption is not classified as a type of liability. Hence, this policy will not cover any lawsuits from property damage or physical injuries.
• Employee accidents or injuries — This policy may pay the employee’s wages but it does not cover any injuries, accidents, and illnesses incurred on the job. Instead, this scenario is covered by workers compensation insurance.
• Utilities — If the property cannot be used, make sure you cut your utilities to avoid bills from piling up. Most insurance providers do not cover utility costs.
• Closure from inactive power lines — In case a storm or an accident disrupts the power lines and shuts down the electricity, any income loss will not be covered by the policy. A policy requires a business to be closed for 72 hours before the insurance benefits can take effect.
• Voluntary closure — Should business owners choose to voluntarily close down the business, they will not be able to claim any benefits from the policy.

Insurance companies will include the clauses in the business interruption insurance policy and state the scenarios that may trigger the coverage. The policy’s coverage usually starts a few days after the disaster strikes until the business location can become operational once more.

Conclusion

Having a business interruption may help your business stay afloat during a disaster but the policy has its limitations too. If the policy was obtained as part of the commercial property insurance, the coverage only includes the events listed in the policy. For example, if the policy does not include wind damage, the company cannot cash in on the benefits if the operation is disrupted by wind damage.

There are many important factors a business owner must identify first before getting a business interruption insurance policy. However, after reading the details in this article, you probably now understand better how important it is for businesses to get covered by this type of policy.

Hence, it is important to discuss all the possible scenarios with an insurance professional to help identify the coverage and limitations of this policy. To help you with your policy, get in touch with Save Corporation Tax.