Business Interruption Insurance
Business interruption insurance replaces the income a business loses while it cannot operate because of a covered loss, and continues to pay the fixed costs that carry on regardless. It is normally written as a coverage form attached to a commercial property policy rather than sold on its own.
Definition maintained by the InsurTool Editorial Team. Last reviewed .
Core Takeaways
- It replaces income and covers continuing fixed costs while a covered loss stops the business operating.
- The trigger is normally direct physical damage to insured property by a covered peril — not lost revenue in general.
- It pays for the period of restoration, so the limit has to be sized to the longest interruption you want covered, not to last year’s revenue.
- Underinsurance is penalised twice: once by the limit, and again by any coinsurance clause on the time-element form.
What is Business Interruption Insurance?
In plain English: property insurance rebuilds the building. Business interruption insurance keeps the business alive while the building is being rebuilt. A restaurant whose kitchen burns is made whole on the structure by property coverage and is still insolvent in three months without this, because rent, payroll, and loan payments do not pause for the reconstruction.
The two coverages answer different questions. Property coverage asks what was damaged and what it costs to replace. Business interruption asks what the business would have earned had the damage not happened, and what it must keep paying in the meantime.
How the Trigger Works
The claim does not begin with a lost sale. It begins with damage.
| Element | What it means | Where claims go wrong |
|---|---|---|
| Direct physical loss or damage | Covered property must be damaged by a covered peril | A utility outage or supplier failure with no damage on site |
| To insured property | The damaged property must be of a kind the policy insures | Damage to a landlord’s building where only contents are insured |
| Causing an interruption | The damage must be what stops the business operating | Damage that is repaired without any interruption |
| During the period of restoration | The loss must fall inside the covered time window | Interruptions that continue after a reasonable repair period |
Extensions exist to move each of these boundaries — civil authority, ingress and egress, dependent business interruption, utility services, and service interruption. Each is a named extension with its own sublimit, and none of them is implied. If the business depends on a supplier, a landlord, or a road, the absence of the matching extension is the exposure.
What It Pays For
- Net income. The profit the business would have earned had the interruption not occurred, usually reconstructed from historical financials and projections rather than paid as a lump sum.
- Continuing operating expenses. Rent, loan interest, insurance premiums, property taxes, and similar costs that keep accruing while revenue is zero.
- Payroll. Frequently the largest continuing expense, and frequently subject to its own limitation — either a 60-day or 90-day cap or a percentage of the expense, depending on the form.
- Extra expense. Costs incurred specifically to keep operating or to shorten the interruption: temporary premises, rental equipment, overtime, expedited shipping.
- Extended period of indemnity. An optional tail that continues to pay after reopening, on the reasoning that customers do not all return on day one.
Sizing the Limit, and the Coinsurance Clause
The limit is the total the policy will pay across the whole interruption. Setting it from the last year’s revenue understates it, because the limit has to cover continuing expenses for the full restoration period at projected values, not realised ones.
Most time-element forms then attach a coinsurance clause, commonly 50%, 80%, or 100%. If the limit purchased is below that percentage of the values the insurer determines should have been carried, the claim is reduced proportionally — you are paid the same fraction of your loss that your limit was of the requirement. A policy that is 20% underinsured does not lose 20% of the claim; it loses the same proportion, applied to every dollar of it.
What It Does Not Do
- It does not create demand. A business that was struggling before the loss is not made profitable by the claim. Most forms calculate loss of income against what the business would have earned, not what it hoped to.
- It does not cover a shutdown with no damage on the premises unless a specific extension applies.
- It does not cover the damage itself. That is the property form’s job, on its own limit.
- It does not extend indefinitely. The period of restoration is bounded by a reasonable repair time, and insurers will test whether the reconstruction was unreasonably slow.
Common questions about business interruption insurance
What triggers a business interruption claim?+
Typically a direct physical loss of or damage to covered property by a covered peril. That requirement is the single most common reason claims fail: a business shut by a supplier's fire, a pandemic, or a government order with no damage to the insured premises may have no trigger at all unless the policy is extended.
What does it actually pay for?+
Three things, usually: the net income the business would have earned, the continuing operating expenses it still has to pay, and any extra expense incurred to keep operating or to resume sooner. Payroll is often the largest continuing expense and is sometimes handled by a separate payroll limitation.
How long does it pay?+
For the period of restoration — the time reasonably required to repair or replace the damaged property and resume operations. It ends at the earlier of the actual resumption or the point at which a reasonable business would have resumed, whether or not you did. An extended period of indemnity endorsement adds a tail after reopening to let revenue recover.
Can I buy it on its own?+
Rarely. Business interruption is written as part of a commercial property policy or a package such as a business owners policy, because the trigger is damage to property that policy insures. Some stand-alone forms exist for specific exposures, but the ordinary route is to buy it with the property coverage.
How do I set the limit?+
From the projected income and continuing expenses for the longest interruption you want covered, not from last year's revenue alone. Underinsuring is the most expensive mistake in this line: many policies carry a coinsurance clause that penalises a limit set below the required percentage of projected values.
Is there a waiting period?+
Often. A waiting period of 24 to 72 hours is common on the time-element side, meaning short interruptions are effectively self-insured. Read it alongside the deductible, because a business that routinely shuts for a day at a time may find neither responds.
About this definition
Written and checked against the primary sources linked on this page by the InsurTool Editorial Team. Definitions describe how these terms are used in the United States; policy wording differs between insurers, and state law changes the meaning of some terms. Your own policy document is the authority for your coverage.
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