BUSINESS INTERRUPTION INSURANCE

Business interruption insurance (also known as business income protection, profit protection, or outof-business coverage) is a type of policy that provides a company with funds to make up the difference between its normal income and its income during a forced shutdown. Businesses can be forced to cease or limit operations due to an accident or injury that causes the disability of an owner or key employee, a legal liability claim, or a property loss—which might result from a fire, natural disaster, theft, or vandalism. Self-employed persons and small business owners are particularly vulnerable to the loss of income associated with forced shutdowns. Entrepreneurs often invest a great deal of personal funds in their businesses, and the businesses are often unable to continue operations without their involvement.

Though property, liability, disability, and other types of insurance can provide businesses with protection against specific risks, most policies do not cover the indirect costs associated with losses. When a small business suffers a loss, as in the case of property damage in a fire, it may be forced to shut down for some time or move to a new location, either temporarily or permanently. A typical property damage policy will cover the cost to repair or replace buildings and equipment, but it will not cover the loss of income the business is likely to experience during its downtime. The business thus may be forced to tap cash reserves in order to pay expenses that continue—such as taxes, salaries, loan payments, etc.—even when the company has no income. In addition, the company may face extra expenses in a crisis, such as employee overtime or rent on a temporary location. Finally, businesses confronting temporary operational shutdowns are faced with dramatically curtailed revenue and the prospect that clients and customers—whether longtime or casual—may establish relationships with competitors.

Business interruption insurance steps in to fill the gaps in ordinary property or disability coverage. In most cases, this type of policy pays the business's ongoing expenses—such as rent, electricity, phone, heat, water, taxes, mortgage, and maintenance—plus compensates the owners or shareholders for lost revenues during a forced shutdown. Some policies also cover employees' salaries. In general, the benefits paid under a business interruption insurance policy are taxed as business income, but the policy premiums are tax deductible. The tax status depends on the type of policy and is subject to change, however, so small business owners should consult with their legal or accounting advisors to gain the maximum tax advantages.

Many business interruption policies tend to become a bit technical, particularly in determining the amount of the benefit paid for lost income. Since it can often be difficult to predict the future profitability of a firm—particularly a relatively small or new one—the payment may be based on the prior year's results. This information may come from the company's own records or from its tax returns. In either case, maintaining a second copy of important records in off-site storage can help facilitate claims. If a business operated at a loss during the previous year, then most policies only compensate the owner for fixed expenses. Business interruption coverage can be tailored to the needs of a specific business. For example, some policies feature special provisions that reimburse lost income until the company is able to resume normal operations, rather than when it is able to reopen in a makeshift fashion. Other provisions are available to cover businesses with seasonal income fluctuations.

Business interruption insurance can also provide a small business with income protection in the event an accident or injury causes the disability of an owner or key employee. This type of policy is usually combined with basic individual disability coverage. Basic disability benefits generally begin one month to one year after the onset of the disability, can last between two years and the remainder of the person's life, and pay between 60 and 70 percent of the individual's usual income during the period when he or she is unable to work. Though this type of policy is important to help an owner or key employee cover living expenses, additional benefits—in the form of a business interruption insurance policy—are often needed to keep the business running in his or her absence.

Small business owners who rely on the Internet should also inquire about expanding their business interruption policies to cover disruptions to their ebusiness. Hacker attacks, known as "denial of service" incidents among insurance professionals, are a particular cause of concern for companies that rely exclusively on Internet sales. "The business interruption portion of an e-commerce insurance policy usually will cover the cost of sending consultants to the company to help stop the attack and determine how to prevent future attacks," stated Rose-Robin Lamb in LI Business News. "It also covers loss of income for the time that an e-commerce site was down and unable to accept business." But these special e-business provisions can also provide protection to small businesses that suffer from other telecommunications failures.

INTERRUPTION INSURANCE AND CONTINUITY PROGRAMS

Small business experts urge entrepreneurs to research their options in the realm of business interruption insurance and select the one that works best for them. But they also caution small business owners that such policies, while extremely valuable in terms of preserving the financial viability of an enterprise, are often not, in and of themselves, sufficient to keep a business afloat during difficult times. Business interruption insurance should be only one element in an overall "business continuity" program. These programs, which can be developed in conjunction with many insurers, seek to address all company functionalities in the event of a business interruption. Their principal aim is to help the company resume operations in as timely and efficient a manner as possible. Interruption insurance is usually the cornerstone of such programs, but it is hardly the only element. Business continuity programs also seek to minimize a company's financial and operational vulnerabilities and protect its customer base, work force, and assets in the event of an interruption. They also help companies adopt training programs and preventive policies to minimize the likelihood of a business interruption in the first place.

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