Business interruption insurance, also called business income coverage, replaces the income a business loses and the extra expenses it incurs while its premises are unusable after a covered property loss such as a fire. It is usually part of a commercial property policy and pays for a defined restoration period.
A property loss has two costs: repairing the property and the revenue lost while it is unusable. Property insurance pays the first. Business interruption insurance pays the second. Insurers such as The Hartford describe it as coverage that helps replace lost income and pay expenses when a business cannot operate after a covered loss; IRMI's entry on business income coverage gives the policy-form definition.
What it covers
| Component | What it pays |
|---|---|
| Lost net income | The profit the business would have earned during the shutdown |
| Continuing expenses | Payroll, rent, loan payments, and other costs that continue while closed |
| Extra expense | Costs to keep operating from a temporary location or to speed the return |
| Extended period | Reduced income for a period after reopening while customers return |
Why it matters in a lease
For the landlord, a tenant's business income coverage is rent protection. The lease clause usually states a duration (twelve months is common) and sometimes requires that rent be included in the covered expenses. Evidence arrives on an ACORD 28 with the property coverages. A general description is at Wikipedia.
What to check
That the coverage exists, that the limit or period matches the lease, and that the policy's cause-of-loss form is broad enough for the location's risks. The certificate shows the first two; the third requires the policy.
Related terms
Frequently asked questions
What triggers business interruption coverage?
A direct physical loss to the insured property from a covered cause, such as fire, windstorm, or water damage from a burst pipe, that suspends operations. Losses without physical damage, such as a pandemic closure or a utility outage off the premises, are usually excluded unless a specific extension applies.
Why do landlords require tenants to carry business interruption insurance?
So the tenant can keep paying rent after a loss. A retail tenant closed for six months by a fire with no income coverage is a tenant who stops paying rent and may not reopen. Leases often require business income coverage for a stated number of months, sometimes with rent expressly included.
How long does business interruption insurance pay?
For the period of restoration, the time it should reasonably take to repair or replace the damaged property, subject to a limit or a maximum number of months in the policy. Many policies add an extended period of indemnity so the business can rebuild revenue after reopening.
Does the landlord carry business interruption coverage too?
Usually in the form of rental income or loss of rents coverage on the building policy, which replaces rent the landlord cannot collect while the building is being restored. Tenant and landlord coverages address different income streams and both are typically required.