How Much Does Business Interruption Insurance Cost?

Why Business Interruption Insurance Can Be Worth Paying For

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Like all businesses, your company must earn income to survive. If property on your premises is damaged by a fire or another peril, your business might be forced to close temporarily. A shutdown could prevent your business from generating revenue and threaten its continued existence. You can protect your business from the risk of an unexpected shutdown by purchasing business interruption insurance.

Business interruption (or business income) insurance may be included in a commercial property or business owners policy. The coverage may require a modest additional premium, but the peace of mind it affords makes it well worth the cost. Learn why business interruption insurance is important, how much it costs, and what some alternatives are.

Key Takeaways

  • Business interruption insurance covers the revenue you lose and the operating expenses that continue when your operations shut down due to physical damage to your property by a covered peril.
  • This type of insurance often includes a waiting period that delays the period of restoration.
  • Small businesses pay an average annual premium of $500 to $3,000 for business interruption insurance.
  • Many business interruption policies exclude losses (including income losses) that result from flood or earthquake damage or contamination by bacteria, viruses, and similar perils.

What Is Business Interruption Insurance?

Business interruption insurance covers income that a business loses and the operating expenses it incurs after it’s forced to shut down due to a fire, windstorm, or another insured peril.

  • Alternate name: Business income insurance

Many commercial property policies exclude certain losses. These include income losses resulting from broken items (like glass) due to a covered item or loss, flood or earthquake damage (which are covered by a separate policy), or contamination by bacteria, viruses, and similar perils, like a pandemic.

Why It’s Important

Suppose you operate a busy coffeehouse in a building you own in a popular tourist area. Your building and its contents are insured under a commercial property policy that doesn’t include business interruption insurance.

Late one night, a windstorm roars through town and destroys half of your building. Repairs take six months, and you’re unable to operate your business or generate any income until they’re completed. Your commercial property insurance will cover the cost of repairing or replacing your wind-damaged property. However, it won’t cover the income you lose or the overhead expenses you must continue to pay during the six-month shutdown.

Business interruption insurance covers income losses and expenses that continue during the “period of restoration,” which begins when covered damage forces a business to suspend its operations and ends when the damage is repaired.

Continuing expenses are the costs you’re obligated to pay even though your business isn’t operating. Examples include rent or mortgage payments, taxes, utilities, and (in some cases) payroll.

To be covered by business interruption insurance, an income loss must result from physical damage by a covered peril to property located at your premises. Income losses that occur in the absence of property damage aren’t covered.

Time Frame for Coverage

Many business interruption forms include a waiting period—a type of deductible provision—that can delay the period of restoration from starting. The waiting period is typically 48 to 72 hours, but those hours can be reduced or eliminated for an additional premium. When a waiting period applies, the period of restoration will begin when the waiting period ends. For instance, if the waiting period is 72 hours, no coverage will apply to income lost or expenses incurred during the first three days of a shutdown.

How Much Does Business Interruption Insurance Cost?

Small business owners pay an average annual premium of $500 to $3,000 for business interruption insurance. The cost of business interruption insurance can vary depending on the following factors:

  • Type of business: Your industry affects your risk of physical losses that can generate losses. For instance, a welding shop has a greater risk of fire than an accounting office, so a welder will likely pay more for business interruption insurance than an accountant.
  • Location: Your geographic location affects your exposure to perils like windstorms and wildfires, which can cause property damage that forces your business to shut down.
  • Your revenue: Because your premium is based on your projected revenue, your premium will rise as your expected revenue increases.
  • Scope of coverage: Your business interruption insurance can be broadened via endorsements. For example, the utility services endorsement covers income losses that result from power outages and other utility service interruptions. Generally, the broader your coverage, the higher your premium.
  • Your insurer: The cost varies from one insurer to another.

How Much Coverage Do You Need?

Once you’ve decided to buy business interruption insurance, you’ll need to determine how much coverage you need.

You can calculate the limit you require by estimating your net income for the next 12 months and then adding your operating expenses.

The calculations are relatively easy if you use a business income insurance worksheet. If you don’t have a worksheet, you can ask your insurer to provide you with one.

One thing you should consider when calculating your business interruption limit is the amount of time you’ll need to make repairs or to reconstruct the damaged property. Many business interruption forms limit the period of restoration to 12 months. If you expect repairs to take more time, you can ask your insurer for a longer restoration period. For an additional premium, some insurers will extend the restoration period to 18 or 24 months.

Other Coverages To Consider

Here are some additional coverages to consider when buying business interruption insurance:

  • Extra expense insurance: Often written in conjunction with business interruption insurance, this kind covers expenses you incur (beyond your normal expenses) to get your business up and running as quickly as possible after a physical loss.
  • Utility services interruption insurance: This type of insurance covers income you lose due to a shutdown of your business caused by the interruption of a utility service.
  • Contingent business interruption insurance: This kind covers income you lose when a major supplier, manufacturer, or customer suffers a disruption and isn’t able to provide raw materials or supplies or purchase your products.

Frequently Asked Questions (FAQs)

How much business interruption insurance do I need?

To calculate the limit you need for your business, estimate your net income for the upcoming 12 months and add continuing expenses. Remember that if business interruption costs exceed the coverage limit chosen, you will have to pay out of pocket for any extra expenses.

How do you calculate the restoration period in business interruption insurance?

Determining the duration of restoration periods depends almost entirely on the facts of each loss and each business. Typically, however, to calculate the restoration period, you’ll need to estimate how much time you’ll need to repair, replace, or reconstruct damaged property—or to move to a different location—so your business can reopen.

Article Sources

  1. The Hartford. “Business Income Insurance.” Accessed Dec. 13, 2021.

  2. California Department of Insurance. “FAQ on Business Interruption Insurance and Other Issues Affecting California Small Businesses.” Accessed Dec. 13, 2021.

  3. Safepoint. "Business Income (Without Extra Expense) Coverage Form," Page 8. Accessed Dec. 13, 2021.

  4. Embroker. "How Much Does Business Interruption Insurance Cost?" Accessed Dec. 13, 2021.

  5. Embroker. "Business Interruption Insurance." Accessed Dec. 13, 2021.