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Flooded park in Houston from Hurricane Harvey with city skyline

What We Learned from COVID: Business Interruption

Did you know that Texas is the most at-risk state in the United States for natural disasters?[1] Texas alone averages $14 billion in property damage annually and accounts for approximately 8% of overall U.S. economic output.[2]

In 2017, Hurricane Harvey resulted in the highest number of fatalities and property damages ($125 billion).[3] So, how are businesses preparing for business interruption due to natural disasters?

One way businesses may prepare for a natural disaster is ensuring your property insurance policy (1) includes business interruption coverage, and (2) covers a wide variety of select natural disasters most likely to impact your business. For example, if you’re based in Texas, ensuring your property insurance policy covers hurricane or hurricane-related damages, such as flooding, can help offset the economic and financial impacts these types of natural disasters have on your business.

Business interruption coverage is oftentimes included in property insurance policies and provides economic support for losses resulting from property damage. Generally, business interruption covers direct physical loss or damage to property. For example, flooding from a tropical storm may damage property and interrupt business operations during repairs. Each property insurance policy outlines which events are protected under business interruption coverage.

Given the ongoing COVID pandemic, business owners are likely curious if business interruption policies cover physical distancing orders or other government-directed orders that result in lost business. While coverage depends strictly on policy interpretation and claim details, most business interruption policies do not cover these types of pandemic-related claims due to public health concerns, not perilous events at designated business properties. However, some insurance providers like Chubb, are providing pandemic-related loss coverage, such as workers’ compensation, travel insurance, and business interruption where direct physical loss or property damage is not required (i.e., canceling an event).

Here are some important business interruption coverage concepts you should understand:

  1. Clause vs. Endorsement

Most property insurance policies include business interruption or business income as a clause within the form or as an endorsement to Insurance Services Office forms. While clauses and endorsements may vary slightly, they both typically use consistent language to explain business interruption coverage.

The purpose of business interruption clauses and endorsements is to protect the insured from losses of business income sustained as a result of direct physical loss, damage, or destruction to insured property by a covered liability.

  1. Actual Loss

An actual loss resulting from direct physical loss or damage to property by a covered liability. The insurer is responsible only for actual interruption of business leading to lost business income. However, the actual loss provision is subject to policy limitations, such as location-specific coverage or type of risk that causes such loss.

  1. Business Income

Insurers typically cover the partial or complete net income loss resulting from business interruption. Insurers define business income as:

  • Net income (net profit or loss before income taxes) that would have been earned or incurred
  • Basic operating expenses (i.e., payroll) that continue to incur regardless of business interruption
  1. Restoration Period

Business interruption insurance typically only covers the restoration period – the period for which business income is lost due to repairs of damaged or destroyed property. A restoration period commences at the time physical loss or damage occurs and concludes once the property has been repaired or replaced and the business location is prepared to resume operations.

If your policy expires, it does not necessarily mean that your restoration period is completed. If the physical loss occurs during the policy period, business interruption endorsements cover the duration of the restoration period. For example, the ISO endorsement provides a 30-day extension of the restoration period. This extension offers the insured business expanded coverage to recover pre-loss income.

If additional extensions are required, businesses may buy indemnity optional endorsement, which provides up to 720 days for restoration.

  1. Additional Expense

Like the indemnity optional endorsement, many business interruption policies can provide additional coverages, such as extra expenses. Additional expense coverage covers necessary costs sustained during the restoration period that would not have occurred absent physical loss or damage to property caused by a covered event. Most expenses resulting from the loss are covered so long as the amount does not exceed the loss itself.

  1. Service Interruption

Service interruption is another extension business income coverage can provide. It covers lost business income resulting from direct physical loss, damage, or destruction of electrical, steam, gas, water, sewer, phone, or other utility service transmission lines, related plants, substations, and equipment. Some restrictions of coverage may include distance limitations (i.e., the distance between a utility property and the insured’s business location), certain risks (i.e., natural disasters like earthquakes), overhead transmission and distribution lines, or a waiting period (typically 24 to 48 hours).

  1. Contingent Business Interruption (CBI)

A CBI provides coverage for lost business income resulting from physical loss, damage, or destruction of property owned by someone else, such as insured suppliers of goods and services and insured’s consumers. CBI coverage is typically treated like loss, damage, or destruction of the insured’s property.

  1. Attraction Property

If you’re a business owner of an attraction property, such as an amusement park, casino, or mall, obtaining a leader property endorsement can offer coverage for direct physical loss, damage, or destruction of property not owned or operated by the insured. However, the property must fall within distance specifications of the insured’s property or business and promotes the insured’s business.

  1. Civil or Military Authority Interruption

This extension covers actual loss of business income resulting from inaccessibility to business premises by civil authority as a direct result of physical damage to property. The most common coverage period for this type of extension is 30 consecutive days and may require a waiting period of 48 to 72 hours before coverage is applied.

Business interruption and business income insurance is integral for business sustainability and preparation for unforeseen circumstances. If we learned anything from COVID, it is that businesses must prepare for the unexpected. Business interruption and business income insurance can assist you through hard times. To learn more about pandemic-related expense coverage under business interruption or business income insurance policies, please contact Harbor America. Our safety and risk management specialists can provide you industry best practices, resources and tools, and professional support to ensure your business is prepared for these unfortunate, unpredictable situations.

CBS – Dallas Fort Worth

[1] ValuePenguin
[2], [3] ESRI