The Importance of Business Interruption Insurance Coverage

The value of Business interruption insurance is best illustrated by example.
Steve’s Flower Shop rents a commercial space in a downtown area. Steve’s income is derived primarily from purchasing wholesale live flowers and creating arrangements and selling those arrangements at retail. Steve’s shop has coolers to preserve the arrangements, an area to create the arrangements, and a retail space for customers. Steve’s rent and utilities are his highest expense. To save costs and increase profits, Steve’s purchases its wholesale flowers in bulk through a local distributor with a long-term contract. Let's say Steve’s clears $500 per day. Of that amount, $350 is cost for utilities, rent, wholesale product, supplies, and etcetera. Steve’s makes $150 per day which is acceptable to Steve – this is his retirement business after years as an overworked business lawyer.

Then… the storm comes. Steve’s shop is wiped out. The commercial space is uninhabitable. The coolers are gone. A shipment bound for a customer is gone and the stock is gone. Steve submits a claim to his property insurer. Within a few days, the insurer has put Steve in touch with a contractor and has cut a check to Steve to replace the equipment.

The contractor, owing to a lack of supplies in the devastated area, cannot begin work for two weeks. The cooler company cannot deliver new coolers for two weeks. Once work begins it will be another two weeks until operation can resume. Steve’s will be out of business for one month.

Steve must make his rent and utilities payment – these payments do not stop because of disaster. To keep his wholesale contract, Steve must place a minimum order with his supplier. Steve’s is still incurring $300 per day in expenses. Steve cannot sell any flowers. Steve’s will still have $9,000 in expenses for the month and no income for that month out of operation. Put in terms of profits, it will take Steve’s two to three months of profit just to zero out the loss in expenses.

It is even grimmer if Steve depended on the $4500-5,000 of profit as his sole source of personal income. Steve still must pay personal expenses – with no income. Can Steve even survive the three months to cover this one month of lost income?

If Steve’s had Business Interruption Insurance…


If Steve’s Flower Shop had Business interruption insurance, then the insurance would cover the amount lost due to the interruption based upon the time, quantity, and value of the lost production. Steve would submit a claim based upon his business records showing that he “would have” had $15,000 in sales with $10,500 in expenses and a profit of $4,500. Steve’s Flower Shop would have this amount covered in addition to the property coverage replacing the physical location.

If Steve’s had “Extra Expense” Coverage…


If Steve’s can still get wholesale flowers, then Steve’s may be able to open up temporarily at another location. Steve finds another location that charges additional rent for the short term rental. Steve can rent a cooler. Steve has to drive further to make deliveries. But, Steve’s can get up and running in a few days. With “extra expense” coverage, the extra expenses of increased rent, cooler rental, and increased delivery costs would be covered in order to get the business up and running. In fact, the insurer may help to get this done because extra expense is typically much cheaper for the insurer to pay than a full business interruption loss.

The example here is over simplified. However, it is reflective of the reality of most small businesses. Many small businesses fail after a disaster. The businesses fail, not because of a lack of property insurance, but because the business could not recover from the loss of income.