Business Interruption Insurance for Rental Property: What You Need to Know

If you are a landlord who rents out property for your business, you may have heard about business interruption insurance.

This type of insurance can help you recover from financial losses caused by a temporary shutdown of your rental operations due to a covered event, such as a fire, storm, vandalism, or civil authority order.

Business Income Insurance
Business Income Insurance | photo courtesy | Redasia Insurance

What is Business Interruption Insurance?

Business interruption insurance, also known as business income insurance or income loss insurance, is coverage that protects your business from the loss of income you suffer as a result of a direct physical loss or damage to your insured property by a covered peril.

It is typically added as an endorsement to your commercial property insurance policy or included in your business owner’s policy (BOP).

Business interruption insurance covers the revenue you would have earned based on your financial records if the disaster had not occurred.

It also covers operating expenses, such as rent, utilities, and payroll, that continue even though your business activities are suspended. Some policies may also cover the extra expenses you incur to relocate your business temporarily or to minimize the interruption of your operations.

How do you calculate gross profit for business interruption insurance?

Gross profit for business interruption insurance is a crucial indicator of the potential income a business could have generated had it not faced an interruption from a covered event, such as a fire, storm, or vandalism.

The calculation involves subtracting variable costs from the business turnover.

Variable costs encompass expenses that fluctuate depending on the level of production or sales, including purchases, bad debts, carriage, packing, and freight.

On the other hand, turnover represents the total revenue received from customers for the goods or services sold.

To calculate the gross profit for business interruption insurance, use the following formula:

Gross profit = Turnover – Variable costs

For instance, consider a scenario where a business achieves an annual turnover of $500,000 and incurs variable costs of $200,000. The calculation would look like this:

Gross profit = $500,000 – $200,000 Gross profit = $300,000

This implies that the business would have earned a gross profit of $300,000 if it had not faced an interruption from the covered event. This figure serves as the foundation for determining the business interruption insurance coverage and claim.

When does business interruption insurance apply?

Business interruption insurance applies when certain circumstances prevent you from conducting your normal business activities at your rented premises.

These circumstances may include:

Inclement weather damage

Severe weather events, such as windstorms, tornadoes, and hail, can cause physical damage to your property and force you to suspend your operations until repairs are completed.

Fire

A fire can destroy or damage your property and its contents, making it unusable for your business.

You may have to relocate your tenants temporarily or find alternative sources of income until the restoration is done.

Vandalism or theft resulting in unsecured premises

If someone breaks into your property and damages or steals vital security features, such as windows or doors, you may have to close your business until you can restore the security of your premises.

Equipment failures

If essential equipment or systems fail, such as the HVAC, plumbing, or electrical systems, you may have to stop your operations until they are fixed or replaced.

This may affect your ability to provide habitable conditions for your tenants.

Civil authority ingress or egress

If the government orders the closure of a business or an area, typically due to physical damage to a neighboring property not controlled by you, you may lose access to your premises and lose income as a result.

What is not covered by business interruption insurance?

What is not covered by business interruption insurance?

 

What is not covered by business interruption insurance?
Infographic portraying what is not covered by business interruption insurance.

 

Business interruption insurance does not cover the following:

Actual damage or repair costs to the property

Business interruption insurance only covers the financial impact of the loss of income due to a covered event.

It does not cover the actual physical damage or repair costs to the property itself.

These costs are covered by your commercial property insurance policy.

Losses due to non-covered perils

Business interruption insurance only covers losses caused by perils that are not excluded from your policy.

For example, if your policy excludes flood damage and your property is flooded due to a storm, you will not be able to claim for business interruption losses.

Losses due to pandemic or virus

Most business interruption policies exclude losses caused by pandemic or virus outbreaks, such as COVID-19.

This means that if you have to close your business due to government lockdowns or health regulations related to the pandemic, you will not be able to recover your lost income from your insurer.

How Much Does Business Interruption Insurance Cost?

The cost of business interruption insurance depends on several factors, such as:

The size and type of your business

The larger and more complex your business is, the more income you stand to lose in case of a disruption.

Therefore, you may need more coverage and pay higher premiums than a smaller or simpler business.

The location and condition of your property

The location and condition of your property affect the likelihood and severity of potential risks that could interrupt your operations.

For example, if your property is located in an area prone to natural disasters or crime, you may face higher premiums than if it is located in a safer area.

The amount and duration of coverage

The amount and duration of coverage determine how much money you can receive from your insurer in case of a claim.

The higher the amount and longer the duration of coverage you choose, the higher the premiums you will pay.

According to NerdWallet, the average cost of business interruption insurance is about $1,200 per year for small businesses.

However, this is only an estimate, and the actual cost may vary depending on your specific situation and needs.

Conclusion

business income insurance is a valuable coverage for landlords who rent out property for their business.

It can help you recover from the loss of income and expenses you incur due to a temporary shutdown of your operations caused by a covered event.

However, business business income insurance, does not cover the actual damage or repair costs to the property, nor does it cover losses due to non-covered perils or pandemic or virus outbreaks.

Therefore, it is important to understand the terms and conditions of your policy and compare different options before buying one.

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