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Decode different types of business interruption insurance

Business interruption insurance can be difficult to navigate because not all policies are the same. Here's what to examine when exploring insurance options.

An often-overlooked aspect of business continuity and disaster recovery planning is the financial burden of unforeseen downtime.

Most business continuity and disaster recovery (BCDR) administrators are aware that business interruption insurance is available to cover some or all downtime-related costs, including lost income. However, many aren't sure what a policy includes or excludes, or how it can be acquired.

Add coverage to a property/casualty policy

Business interruption insurance is necessary to protect an organization from income losses accrued throughout the entire recovery period, said Collen Clark, an attorney at Schmidt & Clark LLP, a Washington-based law firm.

"It entitles a company to the amount of profit equivalent to what would have been earned had there been no interruption of the business," Clark said.

There are various types of business interruption insurance. Coverage, however, is generally not sold as a separate product but as a rider added to a comprehensive property/casualty policy, said William Walzer, a partner at New York-based law firm Davidoff Hutcher & Citron LLP. "The coverage provides replacement of lost income suffered by a business as a result of damage to the business's real property caused by a covered risk," he said.

Consider what the plan covers

Gregory Rozdeba, president and co-founder of Toronto-based digital insurance brokerage Dundas Life, said that admins must understand exactly what types of costs are covered by the policy, including temporary relocation expenses, labor costs, taxes and loan payments. "Ensure that the policy you choose covers every expense ... should your business suffer any disruptions," Rozdeba said.

It's also important to know what a policy won't cover. "Most policies will not cover utilities or broken items, so you need to be prepared to go out-of-pocket for these," Rozdeba said. "Go through the excluded events thoroughly before signing the policy so that you know what events are covered and which are not."

Insurance policies are contracts and are notorious for their fine print, which often contains exclusions from and limitations on coverage.

To cover any policy gaps, Walzer noted that optional endorsements are available to provide enhanced coverage.

"For example, manufacturers and producers can obtain a special endorsement called contingent business income coverage, also known as dependent properties coverage," Walzer said.

This endorsement is specifically designed to protect policyholders against economic loss caused by damage to property owned by other parties, such as upstream suppliers and downstream customers. Likewise, a utility services endorsement will extend coverage to any suspension of operations caused by a disruption of basic utility services delivered to a business' premises, such as electric, gas or water deliveries provided by public or private utility companies.

Read the fine print

Insurance policies are contracts and are notorious for their fine print, which often contains exclusions from and limitations on coverage. "Ideally, a business seeking to properly manage its risks will have a knowledgeable insurance agent who will consider the particular risks of the business and determine the appropriate coverage," Walzer said.

During policy acquisition negotiations, BCDR administrators should work closely with their organization's accountants and attorneys to ensure that coverage is comprehensive and priced fairly. "In the event that ... a claim is necessary, the assistance of an accountant, educated with the policy's principles, is essential for the assembly of the claim," Clark said.

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