Some types of commercial insurance are easier to explain and understand than others.
While most business owners are aware that liability insurance is meant to protect them from claims of physical injury and damage, commercial property insurance is meant to protect their business from things like fire damage and commercial vehicle insurance is meant to cover vehicles that are used for business purposes, there are other types of small business insurance that may not be so easy to comprehend.
Let’s take a closer look at one of those; business interruption insurance.
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WHAT IS BUSINESS INTERRUPTION INSURANCE?
Business interruption insurance is triggered if a business needs to shut down because of an insurable peril.
When triggered, depending on what variation of business interruption coverage is on the policy, it may cover continuing expenses or even profit replacements.
Business interruption insurance is usually an optional coverage, unless it is already included within a policy offered to specific groups and/or segments by an insurer.
WHAT CAN A BUSINESS INTERRUPTION POLICY COVER?
Imagine a restaurant that just suffered a kitchen fire, a bed and breakfast that lost part of their roof during a wind storm or a contractor that had their truck full of tools stolen.
When a business needs to shut down because of these types of insurable perils, a business interruption policy can step in to cover expenses such as rent, loan payments, employee payroll and property taxes.
GROSS EARNINGS
Pays out until the property is repaired or stock is replaced.
PROFITS
There are limits involved, but generally it pays out until the business has resumed normal pre-interruption levels or until the max indemnity period has exhausted, whichever comes first.
EXTRA EXPENSES
This can include things like re-location costs if a business is able to remain operational during periods affected by a loss.
BUSINESS INTERRUPTION EXCLUSIONS
Since business interruption insurance only covers insured perils, there will be some scenarios where a business is shut down that business interruption coverage would not apply.
Some of these exclusions may include:
- Certain natural disasters such as a flood or earthquake.
- Income that is not documented in a business’s official financial statements.
- Utilities. Since they are generally shut off during a business shut down.
- Any damage to property that is already covered by a commercial property insurance policy.
- Pandemics or communicable diseases (yes, including COVID-19)
IS BUSINESS INTERRUPTION INSURANCE TAXABLE IN ONTARIO?
Business interruption insurance premiums are tax deductible like any other business insurance expense.
When a business receives lost revenue through a successful business interruption claim, the Canadian Revenue Agency (CRA) treats it like any other type of income and is taxed accordingly.
HOW MUCH DOES BUSINESS INTERRUPTION INSURANCE COST?
Like most other types of business insurance, how much you’ll pay for business interruption insurance is heavily dependent on various factors.
A key factor is what type of coverage for Profits limit you’d require.
It’s best to have your accountant complete a business income worksheet provided by your insurer to determine the limit of coverage that you need. The general rule of thumb say 40% of gross annual revenue is usually the limit for the retail sector while manufacturing sector is around 25-30%.
Other factors that can help determine cost are:
- The value of your commercial property
- The industry you’re involved in
- Where your business is located
- Whether it’s a standalone policy or bundled in a package
All of this can have an impact on what your business interruption coverage will cost.
Generally speaking, business interruption insurance typically costs the average business somewhere in the $50 to $125 per month ball park ($600 to $1500 per year) but could be significantly more for a larger sized business increased risk considerations.
However costs can range significantly higher for some businesses so it’s good to get a personalized business interruption insurance quote from a reputable insurance provider.
Erie Mutual Insurance proudly serves the commercial insurance, farm insurance, home insurance and auto insurance needs of members throughout Southern Ontario including Haldimand, Niagara and Hamilton.
Please don’t hesitate to contact us with any questions you may have about this or any other topic related to your insurance.
