What is it?
At a very high level, business interruption insurance (“BII”) protects the insured when business operations are interrupted (no, really?!). Typically this coverage is paired with others, including General Liability and Cyber Liability.
There are plenty of nuances to what any given policy covers and business interruption insurance is no different. A basic business interruption policy, however, will cover tangible property losses (and restoration costs) in the wake of a disaster. It will also cover operating expenses that the business must incur during downtime as well as lost profits in many cases. Think payroll, utilities, rent expense…anything that can’t be slashed in the downtime. The general idea behind business interruption insurance is to make the company whole as if the debilitating event never even happened.
Some important caveats: business interruption insurance generally mimics the underlying policy. For example, if your GL policy doesn’t include flood coverage, the business interruption coverage won’t kick in when you can’t operate due to flooding. The insured must also be able to claim definitive losses, so unless you can clearly prove your profits have been steadily growing for years, you’re likely to be reimbursed for the previous year’s profits (the most definitive benchmark). Make sure to keep good records if you want to get the most out of a BII policy (or any insurance policy for that matter!).
Why do I need it?
Without making an exhaustive list, here are a few different situations where business interruption insurance can be very useful for startups.
1. Lots of tangible assets
BII can be a lifesaver for companies that rely on tangible assets. Anyone that has tangible goods stored in warehouses, for example, would be a prime candidate for this coverage. What happens when a disaster causes the warehouse holding 90% of your inventory to burn to the ground? Conversely, what if your startup provides storage services and owns that warehouse? Without BII, you’re in a much tougher spot when trying to recover.
2. Lots of manpower
You’re launching a business that requires lots and lots of manpower. That could mean lots of developers, top-notch salespeople, a solid management team…whatever. If a disaster hits that prevents the business from operating, you’ll want to retain all that talent you worked so hard to onboard, right? To do that, you’re going to have to keep pumping out those paychecks. A good business interruption insurance policy will cover this as a necessary operating expense.
3. Lots of users
Your product has launched and you have crazy amounts of users. In fact, the current traffic is already eating up most of your servers’ resources. A disaster happens and the building housing your servers burns down, crashing your site/app. This is an example of where BII on both GL and cyber policies can work together to give you maximum coverage, covering both the restoration of your tangible assets (servers) and data recovery costs.
You’ve made it! It was a struggle, but you’ve hit a tipping point and your company is posting growing profits month after month. This is where you’ll likely be able to prove that profitability growth rate and recover maximum lost profits in addition to normal coverage. Don’t let that disaster slow you down…keep the momentum going!
There are quite a few situations in which BII coverage can come in handy for a startup. In some situations, it may even save the company from going under. When considering what coverage your company needs, be sure to consider BII and how a disastrous event would effect your operations.