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April 25, 2023

Protecting your business from disruption

Business interruption coverage is part of a comprehensive risk mitigation plan

Sean Mayer

When we think about business interruption, we imagine damage by fires, storms, or accidents. In today’s world, though, natural disasters and broken water mains are a small part of the bigger picture. Disruption can come in the form of global health incidents or cybercrime attacks. Even train derailments can cause disruption to your operations and supply chains.  

The Federal Emergency Management Agency (FEMA) estimates that nearly 25% of businesses fail to reopen following a natural disaster. In addition, more than one in three businesses was affected by ransomware in 2021, and more than half of small businesses that experience a cyberattack will go under within six months. A 2021 ITIC survey estimated that 91% of mid-sized and large companies lose upwards of $300,000 an hour due to downtime.   

A business interruption strategy does not operate in a vacuum. Business interruption insurance coverage is a crucial component of a complete safety plan. If executed properly, this often-misunderstood coverage can save your business from irreparable harm and even keep you from going out of business.  

What is business interruption coverage? 

Business interruption, more commonly referred to as business income coverage, provides income replacement to a business when income is lost in a disaster. There are three elements that must be met for an event to qualify for coverage under a standard business income policy: 

  • A physical loss or damage to property covered under the policy must occur. 
  • The loss took place during the policy period and within the territorial provisions of the policy 
  • The loss must be a result of a peril not otherwise excluded by the policy 

Coverage that fits your business 

Business interruption covers many of the expenses that would be required to keep the business open, even though you may be limited or prevented from doing so. In other words, business interruption helps keep the proverbial till ringing.  

Some of the costs it can cover are: 

  • Lost income 
  • Payroll expenses 
  • Ongoing bills for utilities, financing  

This coverage is not “one size fits all,” so it’s critical to have a discussion with your broker about your company's unique exposures. That way they’ll be able to determine how to tailor the coverage to meet your needs.  

In some cases, coverage limits are chosen arbitrarily, or the business interruption coverage is not related to a company’s actual business exposures. For instance, if the coverage limit is too low and does not extend to equipment breakdown or supply chain exposure, that can result in significant losses. 

Cyber coverage is another element of a business continuity plan that requires careful consideration. Cyber incidents can lead to a loss of income and a temporary shutdown of operations.  

Downtime can equal multiple losses

A manufacturing client experienced a major claim when a part of a piece of production equipment failed, ultimately requiring the equipment to be replaced. Production for this client was halted for 10 weeks while they waited for the new equipment to arrive and be installed. 

During the downtime, the client continued to pay employees, but because they could not produce their primary product, several additional business operation expenses continued. The company also temporarily lost a major client, and the overall income and expenses loss totaled just over $9 million. 

Marsh McLennan Agency (MMA)’s claims team advocated on behalf of the client and guided the insured on handling the claim. Because MMA had properly linked the client’s equipment coverage with their business income coverage and identified the right amount of coverage, the insured stayed in business despite the disruption, and the claim was expedited to meet their needs.

Coming back from a disruption 

When your business is down, a responsive and knowledgeable claims team can have a tremendous impact. Submitting a claim can be complex and time-consuming, but time is of the essence when you need to get back up and running.  

Insurance adjusters often interpret the coverage differently than an insured might, and this can affect what you think you are owed versus the property or equipment values determined by adjustors and carriers. It's important to have a risk advisor who can coordinate with their claims team to be your advocate during this process.

Business continuity and emergency planning are key elements of a successful strategy for keeping your business afloat. It’s essential to have a plan in place to prevent an interruption from happening at all, or once it does happen, to get you up and running as soon as possible. 

Marsh McLennan Agency can help 

Many businesses are not insured properly for an event that could result in days of downtime—or longer. By dedicating time to this topic before disaster strikes and reviewing your coverage annually or in times when you anticipate major changes to your business, you will ensure that your organization doesn’t become a statistic. Reach out to your local MMA representative for assistance.