Business Interruption Insurance – Definition

Cite this article as:"Business Interruption Insurance – Definition," in The Business Professor, updated January 30, 2020, last accessed October 24, 2020,


Business Interruption Insurance Definition

Business interruption insurance is a type of insurance coverage that takes care of business’ income loss in case of a natural disaster. It compensates for the business’ revenue loss as a result of a calamity. When a disaster strikes, a company is likely to shut down its operations to work on its recovery.

In other words, the damage will, to some extent, interrupt the activities, and this is where this insurance policy comes in handy. It replaces the amount of income a business has lost so that it can be able to continue with its normal operations.

A Little More on What is Business Interruption Insurance

Note that insurance companies don’t issue business interruption insurance as a separate policy. Most insurance providers usually add it to a property or casualty policy or make it part of a comprehensive package policy. It is important to note that this type of cover is different from property insurance, which covers only the business’ physical damage. Business interruption insurance covers both the physical damage as well as the profits that the company would have earned.

Business interruption insurance applies to all types of businesses. It designed to ensure that it restores a company to its financial position. The way it would have been if it were not for the loss is has suffered.

What Business Interruption Insurance Covers

Most business owners get confused when it comes to the extent to which business interruption insurance will cover their loss in case of a disaster. The policy typically includes the following:

Profits: Based on the prior business’ financial statement, the insurance company will compensate for the financial losses resulting from business interruption. Note that disaster may lead to loss of revenue, rental income loss, including additional staff costs. So, the policy will cover all the income lost during the restoration period (time taken to restore or repair the physical damage to the property undercover).

Temporary location: In case of extreme damage to the business’ buildings, the company may move to a temporary place to continue with its operations. In this case, the policy will cater for such extra expenses.

Extra Expenses: The policy usually does a reimbursement of expenses that goes beyond fixed costs. The additional payment ensures that the business continues with its operation as wait for the repair of its property.

Commission and training costs: When insurance replaces things such as machines, they usually cater to operators’ training costs, so that they can learn how to operate the new equipment.

Employee wages: When disaster strikes, it does not mean that the company stops paying its employees. So, business interruption insurance ensures that the company can make payrolls for its employees as it works on resuming its operations. The policy is essential for those companies that want to retain their employees even though out of service.

Civil Authority Ingress: Any government directives like curfews or closure of the street usually affect businesses operating within and around that particular place. If your business is working in such an area and you have a business interruption insurance cover, then the insurance will compensate you for the lost revenue.

Loan Payments: Most loan payments are due every month. So, business interruption insurance cover can help you to continue paying loans even though the business is not generating income.

Taxes: Despite disaster hitting the business, the company must still pay taxes. If you cover your business with this type of insurance, it helps you pay taxes on time as you work on restoring your business operations.

Reference for ‚ÄúBusiness Interruption Insurance‚ÄĚ

Academic research on ‚ÄúBusiness Interruption Insurance‚ÄĚ

AGRICULTURAL¬†INSURANCE¬†SCHEMES FOR THE DEVELOPMENT OF RURAL ECONOMY, IBRAHIM, A. R. (2012). AGRICULTURAL INSURANCE SCHEMES FOR THE DEVELOPMENT OF RURAL ECONOMY.¬†AGRARIAN ECONOMY AND RURAL DEVELOPMENT-REALITIES AND PERSPECTIVES FOR ROMANIA, 1. The volume contains the papers accepted and published in the Proceedings of the 3rd International symposium entitled: ‚ÄėAgrarian Economy and Rural Development – Realities and Perspectives for Romania‚Äô, organized by the Institute of Research for Agricultural Economics and Rural Development, Bucharest in cooperation with, Institute of Agricultural Economics, Belgrade – Serbia, Institute for Economy, Finance and Statistics, Chisinau, Republic of Moldova, Academy of Economic Studies – The Faculty of Agro-Food and Environment Economy, Bucharest, Romania, University of Agrarian Sciences and Veterinary Medicine – The Faculty of Management, Economic Engineering in Agriculture and Rural Development, Bucharest, Romania, Petroleum and Gas University of Ploiesti – Faculty of Economic Sciences, Romania, University ‚ÄúDunarea De Jos‚ÄĚ – Faculty of Economy and Business Administration Galati, Romania, under the high scientific patronage of Academy of Agriculture and Forest Sciences “Gheorghe Ionescu Sisesti” and The Balkan Scientific Association of Agrarian Economists, held in Bucharest, Romania, October, 11-13, 2012. The proceedings are structured in accordance with the sessions of the conference and it includes papers and relevant contributions on plenary speakers, Economy, management and agricultural marketing and Rural development and agricultural policies.

On the demand for corporate property insurance, Hoyt, R. E., & Khang, H. (1999). On the demand for corporate property insurance. Available at SSRN 175989. Since changes in the firm-specific or unsystematic risks faced by a corporation have no effect on firm value, corporate insurance purchases would seem unwarranted. However, over 57 percent of insurance premiums are paid by businesses. This apparent contradiction has motivated researchers to suggest factors other than simple risk reduction that create corporate incentives to purchase insurance. This study tests the practical validity of most of the analytic arguments regarding corporate demand for insurance. In general, the empirical evidence from corporate property insurance purchases is consistent with the various theoretical arguments regarding corporate demand for insurance. The results suggest insurance helps reduce various agency costs associated with stakeholder conflicts, provides real services, and reduces taxes. Finally, the less risky nature of the business of regulated industries is believed to lessen the various corporate incentives to purchase property insurance.

Optimal unemployment¬†insurance¬†over the¬†business¬†cycle, Landais, C., Michaillat, P., & Saez, E. (2010). Optimal unemployment insurance over the business cycle. This paper analyzes optimal unemployment insurance over the business cycle in a search model in which unemployment stems from matching frictions (in booms) and job rationing (in recessions). Job rationing during recessions introduces two novel effects ignored in previous studies of optimal unemployment insurance. First, job-search efforts have little effect on aggregate unemployment because the number of jobs available is limited, independently of matching frictions. Second, while job-search efforts increase the individual probability of finding a job, they create a negative externality by reducing other jobseekers’ probability of finding one of the few available jobs. Both effects are captured by the positive and countercyclical wedge between micro-elasticity and macro-elasticity of unemployment with respect to net rewards from work. We derive a simple optimal unemployment insurance formula expressed in terms of those two elasticities and risk aversion. The formula coincides with the classical Baily-Chetty formula only when unemployment is low, and macro- and micro-elasticity are (almost) equal. The formula implies that the generosity of unemployment insurance should be countercyclical. We illustrate this result by simulating the optimal unemployment insurance over the business cycle in a dynamic stochastic general equilibrium model calibrated with US data.

Small¬†Business: Its Place and Problems, Kaplan, A. D. H. (1948). Small Business: Its Place and Problems.¬†University of Illinois at Urbana-Champaign’s Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship. Small businesses have played a significant role in the United States economy throughout U.S. history. In order to better understand their impact, the research examines the role of small businesses upon the U.S. economy, as well as the impact of small businesses on post-World War II employment and wealth. The definition of a small business is discussed; small businesses are defined in terms of size by several governmental agencies, including the U.S. Department of Commerce and the Bureau of Labor Statistics. The prevalence and distribution of small firms is examined, based on both pre-war and post-war statistics. Several industries are studied, including distribution (e.g. retail and wholesale trade), services (e.g. transportation, communication, insurance, real estate), and production (e.g. manufacturing, construction, mining). The characteristics of small businesses, especially those that influence mortality and failure, are identified. Both internal and external factors influence the management of small firms and may contribute to organizational problems. To succeed as a small business owner, substantial financial backing and availability are necessary; this issue and its associated problems are discussed at length. Both public policy governing market and firm issues and market competition within and across industries may impede or promote small business survival and must be considered when examining both small business entry and survival. The advantages created via attendance at a business college significant impact the chances of firm survival and success due to the helpful skills and knowledge attained via these programs. Areas of future concern and research are identified and discussed. (AKP)

The Indian¬†insurance¬†industry: Challenges and prospects, Sinha, T. (2005). The Indian insurance industry: Challenges and prospects.¬†Available at SSRN 792166. This paper begins with an overview of the Indian insurance market in Section II, which highlights the phenomenal growth experienced recently, in line with the country’s improving economic fundamentals. Section III benchmarks the Indian insurance market against other regional counterparts. By comparing growth, penetration, density and other insurance variables, it can be shown that, whilst India is still an underdeveloped insurance market, it has a huge catch-up potential. Section IV presents a necessary overview of the historical development of the sector, but the relevance to the current marketplace is not lost, as the original 1938 Insurance Act still forms the backbone of present insurance regulation. A more detailed dissection of current regulatory issues is offered in Section V. Sections VI and VII discuss issues in the life and non-life insurance sectors respectively. Developments with far-reaching implications, like the proliferation of bancassurance as an alternative distribution channel and the move to allow non-life insurance companies greater freedom in pricing their products, are looked at in detail. Finally, Section VIII summarises the potential and pitfalls of rural insurance in India. Even though there is strong potential for expansion of insurance into rural areas, growth has so far remained slow. Considering that the bulk of the Indian population still resides in rural areas, it is imperative that the insurance industry’s development should not miss this vast sector of the population.

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