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Counsel for Businesses Should Provide Guidance on Business Interruption Insurance

Crises come in many forms.  Annually, crises cost an estimated billion dollars in the United States due to weather and climate disasters, e.g., wildfires, drought, tornadoes, hail storms, and hurricanes.  A company shutdown can also result from theft or governmental executive orders.   As in-house counsel or outside counsel for any business, imagine yourself facing a company shut down due to a crisis or disaster. You may want to consider giving guidance to your client concerning Business Interruption Insurance.   

What is Business Interruption Insurance, and why should counsel for businesses consider and/or monitor their client’s insurance?

The most financially stable business can be crippled by the loss of having to shut down operations for a short or extended period of time. Business Interruption Insurance is a type of insurance that can help bridge the gap and financially help with operating expenses as a result of involuntary interruption of business activities until the business gets through the peril.  It is not a separate, distinct policy, but may be added to a property/casualty policy or included in a comprehensive package policy as a rider.

Counsel for businesses should review their insurance policies, to determine if their clients have Business Interruption Insurance. If not, counsel should determine whether their business client is susceptible to shutdowns.  If so, your client may want to consider Business Interruption Insurance and determine the amount of insurance adequate for your client’s particular exposure.  Some businesses are more susceptible than others.  Businesses located in extreme weather locations such as geographical areas susceptible to natural disasters (hurricanes, winter storms) are exposed to a higher risk of business shutdowns.  Coverage can be triggered by other events such as theft, fire, wind, drought, hail and severe thunderstorms, falling objects or lightning.  

The key is, as counsel, you should help your client plan for the unexpected. If you do, when the crisis occurs your clients, and company leaders and board of directors that you are answerable to will appreciate your legal counsel and advice in this area.  Not to mention the fact that many businesses never recover from a crisis because they did not pre-plan and purchase business interruption insurance.  Pooja Agnihotri wrote an article titled, “17 Reasons Why Businesses Fail” and stated, “not having a contingency plan or never performing risk analysis and mitigation activities is like not having an insurance plan for yourself.”  

The majority of Business Interruption Insurance add-ons cover:

  1. Profits or Lost Net Income.  Based on historical performance (documented financial records), an add-on for business interruption insurance will provide reimbursement for profits that would have been earned had the event not occurred usually for up to one year. Hopefully, your client maintains an off-site secure copy of all financial records in the event the main business facility is destroyed.
  2. Fixed Costs.  Mortgage, rent and lease payments are covered.  
  3. Employee Payroll.  While your client’s business is shut down, they don’t want to lose valuable employees.  While your business isn’t generating revenue, Business Interruption Insurance will cover a company’s payroll for up to one year.
  4. Taxes.  Uncle Sam does not suspend a business’s financial responsibility in the event of a business closure or shutdown.  The Business Interruption Insurance policy can ensure a business pays taxes on time and avoids costly penalties.  Plus, the cost of the add-on is tax-deductible as a business expense.
  5. Loan payments.  If your company shuts down the bank will still expect payment of loans.  The Business Interruption Insurance can ensure your loan payments are timely paid.     
  6. Relocation expenses. For example, in the event of a fire or destruction of your business location you may need to temporarily relocate.  
  7. Commission and training cost. In unique circumstances sometimes employees need to be trained to operate new equipment due to the old equipment being damaged in the crisis.  
  8. Civil authority ingress/egress. These are rare, but in the event there is a government-mandated closure of the business then the policy will cover this type of loss, e.g. forced closures in the event of civil unrest, curfews, or hurricane evacuation orders.

Business Interruption Insurance usually does not cover broken items resulting from a covered event or loss such as broken products or glass.  Most natural disasters are included in Business Interruption Insurance, but not damages from a flood or earthquake, which are covered by a separate policy.  While the insurance will cover profits or lost net income, it will not cover undocumented income that’s not listed on your client’s financial records.  Lastly and unfortunately, it does not cover pandemics, viruses (COVID), or communicable diseases.  

As in-house counsel or outside counsel advising a business, it is wise to review your client’s insurance policies on an annual basis with the experts and determine whether your client has adequate coverage for vulnerabilities and exposures.  During a time of restoration following a covered peril, Business Interruption Insurance can keep your client afloat until it has recovered. There are limitations and exceptions to this type of coverage, but a robust discussion with your client’s risk manager and company leaders is a smart thing to do to ensure your client is covered.