Everything you thought you knew about business interruption insurance is wrong – About Your Online Magazine


Pandemics aside, in the vast and growing realm of existential business threats – including cyber attacks, looting and power outages – business interruption insurance is a vital risk management tool for even the smallest companies. Sometimes it is the difference between staying afloat and drowning. Operators, their agents and brokers must do more to encourage widespread adoption.

Unfortunately, there is usually not enough understanding about what insurance does. Serving as an extension of a conventional commercial property policy, it guarantees against loss of revenue when a covered hazard forces a company to stop operating for a period of time. It allows the company to pay its ongoing expenses – usually fixed – including payroll and mortgage. It also helps to recover the profit that could reasonably be expected if the business continued to operate. In addition, it covers related extra expenses, such as temporary relocation and fast shipment of critical equipment, and can compensate for abnormal items, such as the need for a generator.

What if your company depends on another company for a product or service that cannot be easily obtained from another source and that company encounters operational difficulties? This type of potentially critical coverage is available under what is known as contingent business interruption insurance.

Companies with such dependence must assess the potential dangers facing the company they depend on. Global supply chains are a key element in any assessment. And if one company is interconnected to another company online, there is likely to be a contingent cyber risk if there is a hack to the other company’s system.

An important caveat about business interruption insurance and contingent business insurance is that, to make effective use of them, a small business must be able to produce financial records that substantiate its claims. Data management and recovery features are essential. All aspects of the claim must be documented so that all benefits of coverage are achieved. Therefore, it is imperative for the policyholder to ensure that he has timely access to all relevant data.

We should expect Covid-19 to be the type of event that occurs once in a century. But Hurricane Katrina and Superstorm Sandy were also considered in this category, and the current century is still young. Remember that disasters can take all types and forms.

In today’s complex and volatile world, business interruption insurance gives small businesses the chance to prepare for and transfer the risks that threaten their long-term sustainability. It is a tool that deserves much more consideration than it currently receives.

Anthony Natole is the managing director of Risk Accountants, a forensic accounting firm in Pleasantville, N.Y.

Paula Fonseca