Business Interruption Insurance can be your company’s disaster lifeline
When things get rough, it’s great to have an insurance lifejacket
By John Bleasby
What do you turn when things really go bad and your company cannot function due a catastrophic loss? Hopefully you had Business Interruption Insurance! As always, understanding how insurance coverage works and what is covers is important. To learn more, we turn once again to contractor insurance expert Dave Elliot of InsureMyTools.ca to help educate contractors on this key element of business planning.
Does “Business Interruption Insurance” differ from “Business Income Insurance”? They sound the same but also a bit different.
Technically, business income and business interruption insurance can be used interchangeably. Although most business interruption polices have the same basic premise, there can be vast differences between each companies wordings. For example, some will cover you for 12 months, others 18 or 24. Some will cover you for losses at your shop only, while others can cover losses occurring at the job site. Some forms of business income will even cover you due to lost profits, even if it’s due to a loss to a neighboring or dependent property.
Will this type of insurance cover me if a job closes down due to problems related to the client and not to me? For example, what if the client has financing problems or is sued by someone, and has to shut the project down?
Normally, business interruption policies will only respond if due to a covered loss such as fire, theft, or vandalism. Most policies will exclude losses due to a client having financing problems. Unfortunately, I have yet to find a policy to insure poor business acumen.
If my business has to stop work due to a fire or the theft of major equipment, is the payout contested if the insurer feels I did not take proper precautions in advance?
Great question! Every company and insurance policy is different. For example, recall when I spoke about locked vehicle warranties a couple of months ago. Some insurance companies will include a locked vehicle warranty, which means in order for a theft to be covered, the contractor must show evidence of forced entry, like a broken lock. For example, if machinery is stolen with no evidence of a broken lock, there is a chance the insurer may also refuse payment on business interruption. Overall, assuming the loss is a covered loss by the policy, and the contractor did everything a reasonable contractor would have done in this case, you should have access to the coverage, subject to the fine print of your policy. If the insurance company feels you may have assisted in the theft, or has unanswered questions, they open an investigation before paying.
What are the limitations regarding location of the theft or damage?
Business interruption normally only provides coverage for direct physical loss or damage to the described premises, ie. the contractor’s business address. As an example, if the contractor’s tools are stolen or burned at their shop, coverage will then apply. If the tools were stolen from a vehicle while parked at Home Depot, there is no business interruption coverage. Another example would be if a backhoe burst into flames while at the jobsite. Most policies will not cover any business interruption since it wasn’t a loss to the described premises. However, we do have the option with some of our higher end policies to include $50,000 business income coverage if there is direct physical loss or damage to tools and equipment while at the job site resulting from a covered cause of loss, but this is a rare coverage.
Does the insurance only cover lost profits, or can insurance also cover wages or salaries due to my staff and crew in the case of an interruption or project closure?
Business Interruption provides coverage for direct physical loss or damage to a described premise. Therefore it is unlikely that it would respond in the case where there is a project closure.
Is this type of coverage typically a blanket policy or can it be written to cover a specific projects that is out of a contractor’s normal comfort zone
No. Sadly, there is no coverage I know of for that exposure.
How is the payout calculated, if based on lost profits? Do I have to demonstrate my charges and costs to prove the amount of lost profit?
Yes, it is based on lost profits, and the contractor would have to supply financials to prove the lost profit.
Typically, how are premiums calculated?
Premiums are usually based as a percentage of the building rate x amount of coverage requested.
Do many contractors, large or small, often take Business Interruption Insurance?
It really depends on the contractor. For smaller contractor operations with a few tools and a pick up truck, this may not be a very important coverage. For those contractors with a large shop where they do the majority of their work, or who perhaps have a large warehouse with specialized stock, this may be a much more important coverage to have —a loss to the shop or warehouse could delay operations and result in lost profits.
Read previous Q & A’s with Dave Elliot of InsureMyTools.ca
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