What Is Business Interruption Insurance?
Business interruption (BI) insurance covers the income your business loses when it cannot operate due to a covered event. Unlike property insurance that covers physical damage, BI insurance covers the financial consequences of that damage - the revenue you would have earned if the loss had not occurred.
BI coverage is typically included as part of a commercial property policy or Business Owner's Policy (BOP), not sold as a standalone policy. This means your BI coverage is tied to and limited by your underlying property coverage.
📊 What BI Insurance Typically Covers
- Lost net income: Profits you would have earned during the interruption
- Continuing expenses: Fixed costs that continue during shutdown (rent, loan payments, insurance)
- Extra expenses: Additional costs to continue operations (temporary location, equipment rental)
- Payroll expenses: Employee wages during the interruption period
- Taxes: Tax obligations that continue despite lost revenue
The Critical Requirement: Physical Damage
The most important - and most litigated - requirement for BI coverage is physical loss or damage to covered property. Your business interruption must result from physical damage that is covered under your property insurance.
This means:
- A fire that damages your building and forces you to close - covered
- A hurricane that destroys your inventory - covered
- A power outage from a utility failure off-premises - usually not covered (no physical damage to your property)
- A government order closing businesses - depends on policy language and reason for closure
🦠 COVID-19 and Business Interruption Claims
The COVID-19 pandemic triggered an unprecedented wave of business interruption claims - and an equally unprecedented wave of denials. The core issue: does virus contamination or a government shutdown order constitute "physical loss or damage"?
The majority of courts have sided with insurers, holding that:
- Virus presence alone does not constitute "physical damage"
- Government closure orders without physical damage do not trigger coverage
- Virus exclusions in many policies bar coverage regardless
However, some policyholders have succeeded where:
- Policy language was particularly broad ("physical loss OR damage")
- There was actual physical contamination requiring remediation
- Civil authority coverage applied due to damage at nearby properties
- Policies lacked virus exclusions (common in pre-2020 policies)
If you have a pending COVID-19 BI claim, consult with an attorney experienced in insurance coverage. The law continues to evolve, and policy language matters greatly.
Types of Business Interruption Coverage
Standard BI Coverage
Covers lost income and continuing expenses when your premises suffer direct physical loss from a covered peril. The "period of restoration" runs from the date of loss until your property is repaired or should reasonably have been repaired.
Contingent Business Interruption (CBI)
Covers losses when physical damage occurs at a supplier's or customer's location, not your own. For example, if your key supplier's factory burns down and you cannot get materials, CBI may cover your losses.
Civil Authority Coverage
Covers losses when a government order prohibits access to your premises due to physical damage at a nearby property. The damage must typically be within a specified distance and caused by a covered peril.
Ingress/Egress Coverage
Covers losses when physical damage prevents customers or employees from accessing your premises, even if your property is undamaged. For example, a bridge collapse blocking your only access road.
Extended Period of Indemnity
Standard BI coverage ends when repairs are complete. Extended period coverage continues for a specified time afterward, recognizing that business does not immediately return to pre-loss levels once you reopen.
| Coverage Type | Trigger | Common Limitations |
|---|---|---|
| Standard BI | Direct physical damage to your property | Period of restoration limits |
| Contingent BI | Damage at supplier/customer location | Named suppliers only; sublimits |
| Civil Authority | Government order due to nearby damage | Distance limits; waiting periods; time caps |
| Ingress/Egress | Physical damage blocking access | Time limits; covered perils only |
| Service Interruption | Utility service failure | Waiting periods; sublimits |
How BI Claims Are Calculated
Calculating business interruption losses is complex and often disputed. Insurers and policyholders frequently disagree on the proper methodology.
The Basic Formula
Lost Business Income = (Projected Revenue - Projected Expenses) for the Period of Restoration
But determining each element involves significant judgment:
Projecting Revenue
- Historical data: What did you earn in the same period last year?
- Trends: Was revenue growing or declining?
- Seasonality: How does this period typically compare to others?
- Economic conditions: External factors affecting your industry
- Contracts: Signed deals that would have generated revenue
Continuing vs. Non-Continuing Expenses
- Continuing expenses: Fixed costs you must pay regardless (rent, insurance, loan payments) - covered
- Non-continuing expenses: Variable costs that stop when operations stop (inventory, utilities) - reduce the claim
- Extra expenses: Additional costs to minimize loss or continue operations - often covered separately
Period of Restoration
Coverage typically applies from the date of loss until the property "should" be repaired with reasonable speed. Insurers often argue for shorter periods than policyholders believe are realistic.
⚠ Common Calculation Disputes
- Insurer uses depressed COVID-era data to project revenue
- Insurer classifies continuing expenses as non-continuing
- Insurer shortens period of restoration unreasonably
- Insurer ignores growth trends or new business
- Insurer applies coinsurance penalties incorrectly
- Insurer fails to account for seasonality
Filing a Business Interruption Claim
- Document the physical damage immediately - Take photos and videos of all property damage. This establishes the trigger for BI coverage.
- Notify your insurer promptly - Report the claim as soon as possible. Note the claim number and all communications.
- Preserve financial records - Gather profit/loss statements, tax returns, contracts, and any documents showing expected revenue.
- Track all losses in real-time - Keep detailed records of lost sales, continuing expenses, and extra expenses as they occur.
- Mitigate your losses - Take reasonable steps to reduce losses. This is both a policy requirement and good business practice.
- Consider hiring a forensic accountant - Complex BI claims often require expert calculation. The cost may be covered as claim preparation expense.
- Submit a detailed proof of loss - Provide thorough documentation supporting your claimed amounts.
- Review the adjuster's calculation - Compare methodology and challenge any unreasonable assumptions or reductions.
California Business Interruption Claims
CACalifornia law provides important protections for business interruption claims:
- Fair Claims Settlement Practices: Cal. Code Regs. tit. 10, Section 2695.7 requires insurers to accept or deny claims within 40 days of receiving proof of loss
- Policy interpretation: California courts interpret ambiguous policy language in favor of coverage
- Efficient proximate cause: Under California law, if a covered peril sets in motion a chain of events causing loss, coverage may apply even if excluded perils contributed
- Wildfire claims: California businesses affected by wildfires may have BI claims even if their property was not directly damaged (civil authority, ingress/egress)
- Bad faith remedies: If your insurer wrongfully denies a BI claim, you may recover consequential damages, emotional distress, and punitive damages
Common Reasons BI Claims Are Denied
1. No Physical Damage
The insurer argues there was no physical loss or damage to trigger coverage. This was the primary basis for COVID-19 claim denials.
2. Excluded Peril
The physical damage was caused by an excluded peril (flood, earthquake, virus). Check whether you have separate coverage for these perils.
3. Waiting Period Not Met
Many BI policies have waiting periods (often 72 hours) before coverage begins. Short interruptions may not trigger coverage.
4. Period of Restoration Disputes
The insurer claims coverage ended before you believe it should have based on when repairs "should" have been completed.
5. Coinsurance Penalty
If you were underinsured relative to your policy's coinsurance requirement, the insurer may reduce payment proportionally.
6. Documentation Issues
Insufficient records to support claimed losses. Maintain detailed financial records and document all interruption-related expenses.
💡 Fighting a BI Claim Denial
If your business interruption claim is denied, do not accept the denial without review. Request a written explanation citing specific policy provisions. Have an attorney or public adjuster review the denial against your policy language. Many denials are based on incorrect interpretations or factual errors that can be challenged.
Maximizing Your BI Recovery
- Understand your coverage before a loss: Review your policy annually with your broker
- Maintain excellent financial records: Clean books make claims easier to prove
- Document everything during a loss: Keep contemporaneous records of all impacts
- Engage experts early: Forensic accountants and coverage attorneys can maximize recovery
- Do not accept initial offers without analysis: First offers are often low
- Consider the appraisal process: For disputes over amounts, appraisal can be faster than litigation
- Know your deadlines: Policies have proof of loss deadlines and limitation periods