Business Interruption Insurance: What It Will -- and Won't -- Cover

entrepreneur.com

70 NEWS JAPAN - If you think you don’t need business interruption insurance, you might want to talk to Allison Dorst. The Chatham, N.J., resident, who operates three ecommerce websites selling sportswear, was reimbursed for $10,000 in storage and relocation costs after an early winter snowstorm in 2011 caused a week-long power failure and melting snow endangered $50,000 of inventory stored in her basement.

Read - How to Revive Lapsed LIC Insurance Policy Online

This fall, Superstorm Sandy brought a prolonged power failure that shut down Dorst’s customer-service lines, causing sales to evaporate. She’ll also see lower sales because of a month-long delay in the delivery of next season’s styles. Fortunately, her interruption policy will reimburse the profit Dorst lost because of those missed sales.

"That was real money last time, but nothing compared to what I’m going through now," she says. Most standard business insurance policies cover only loss or damage to tangible items -- your equipment and inventory and your warehouse, office or store -- and not lost profits if your business cannot operate.

To get business interruption coverage added to your business policy, you’ll need to document your current net income. If your net profits are substantial, beware of low per-incident limits -- $30,000 per incident is common – because they might cap your coverage far below the amount you’d need, McGrath says.

If your company is growing quickly, document many months of profits to demonstrate that income is accelerating. If you suffer an interruption, this will allow you to project that income would have continued to grow. Otherwise, the insurer may limit your coverage to the amount of the past year’s profits, says Bob Freitag, a public claims adjuster at AmeriClaims in Indian Trail, N.C.

Read - Does Your Home Business Need Insurance?

Next, carefully note the types of interruptions you want to cover. Your interruption coverage will mirror what you covered in your main business policy, Freitag says. If you didn’t include flood coverage in your general policy, for instance, you won’t have interruption coverage for flooding, either.