What do the top business interruption insurance policies in the US cover?

What do the top business interruption insurance policies in the US cover? | Insurance Business America

What do the top business interruption insurance policies in the US cover?

Half of the US respondents to Allianz Global Corporate & Specialty (AGCS)’s latest Risk Barometer survey viewed business interruption as the biggest risk facing companies in 2022, marking the third consecutive year that supply chain disruption has topped the annual rankings.

Despite this, only 40% of small enterprises have taken out business interruption coverage, according to the most recent figures from the Insurance Information Institute (III).

This is an especially concerning fact given that of all small businesses that were forced to shut down operations because of a disaster, 40% have failed to reopen, a quarter closed permanently within a year, and a whopping over 90% ceased operations within the next two years – according to a 2020 study from the Federal Emergency Management Agency (FEMA) has found.

Read more: Business interruption the "overarching umbrella" on top 10 global business risks

These figures demonstrate how important business interruption insurance is, especially for companies operating in a physical space or those with expensive machinery as any damage or disruption could significantly impact their productivity and even jeopardize their survival.

How does business interruption insurance work?

Business interruption insurance, also called business income insurance, is designed to protect companies against financial losses incurred from the disruption of their operations resulting from an insured peril. It pays out the operating costs – including potential revenue, rent or mortgage, loan repayments, employee salaries, and taxes – while the business temporarily shuts down. Some policies provide coverage for additional expenses related to the closure such as those accompanying setting up a temporary location or the training of staff to use new equipment.

For small and medium-sized enterprises, BI coverage is often included in a business owner’s policy, which is a specialized type of insurance that bundles different coverage options companies need, including general liability, commercial property, and workers’ compensation cover.

Business interruption policies typically entail a 48- to 72-hour waiting period to kick in. This is indicated in the policy’s restoration period, which initially lasts for 30 days but can be extended to up to a year.

What are the top causes of business interruption?

A five-year data analysis of insurance claims conducted by AGCS has found that fire and explosion were the leading causes of business disruption globally, accounting for 30%, or $6.7 million worth, of all BI losses. This was followed by storms (21%), water damage (12%), machinery breakdown (5%), and flooding (4%).

In the insurance giant’s latest risk barometer survey, however, 52% of respondents said cybercrime, which was driven by the recent spate of ransomware attacks, was the business interruption trigger they feared the most, followed by natural catastrophes (36%), pandemic outbreak (35%), and transportation and shipping disruptions (30%).

Does business interruption insurance cover COVID-19-related losses?

Whether BI policies should cover pandemic-related losses has been a contentious issue between insurance companies and businesses affected by COVID-19. The insurance industry maintains that pandemics cannot be covered because of the scale of their impact.

“Pandemics are an extraordinary catastrophe that can impact nearly every economy in the world, so it is hard to predict and manage the risk,” said Sean Kevelighan, chief executive officer at III, in a 2020 statement. “Pandemic-caused losses are excluded from standard business interruption policies because they impact all businesses, all at the same time.”

This, however, has not stopped businesses seeking compensation from taking their arguments to court. To date, the University of Pennsylvania Carey Law School’s COVID-19 coverage litigation tracker has recorded more than 1,900 lawsuits over business income coverage, with the majority of lawsuits coming from companies in the food services sector.

Read more: Business interruption ruling is 'another brick in the wall' for insureds

According to the National Association of Insurance Commissioners (NAIC), insurers began excluding viral and bacterial infections from their business interruption policies after the severe acute respiratory syndrome (SARS) outbreak in 2003, which caused billions of dollars in losses to the industry. Since then, insurance providers have edited their policy language to exclude viral and bacterial outbreaks.

What do the top business interruption insurance policies in the US cover?

To find out which insurers in the country provide the best BI cover, Investopedia analyzed the policies of 35 insurance companies offering business interruption coverage. The New York-based financial website also considered each provider’s industry experience, financial stability, and customer satisfaction. Here are the ones that came out on top. The list is arranged alphabetically.  

1. Chubb

Investopedia named Chubb the best for claims processing after the insurance giant achieved top marks in a recent survey of brokers and risk managers conducted by insurance data provider Advisen. Chubb offers business owner’s policies to companies with up $30 million in revenue across all 50 states, the District of Columbia, and Puerto Rico. BI coverage can be added to the basic policy. The insurance giant also garnered an above-industry-average customer satisfaction score in J.D. Power’s latest small commercial insurance study and an A++ rating from AM Best, indicating superior financial stability.

Read more: How big data is changing insurance to predict and prevent - Chubb

2. Farmers

Farmers’ business owner’s policy comes with business interruption coverage, which allows some policyholders to claim 100% of their expected income. Named the best for retail businesses, Farmers’ BOP can be customized to include 20 different endorsements, some of which are tailored for retailers, including equipment breakdown and outdoor signage replacement. The California-based insurer got an above-industry-average mark in customer satisfaction and a solid B++ rating for financial stability.

3. Nationwide

Nationwide offers the widest range of business interruption coverage among all assessed insurers, earning the best overall title from Investopedia. It provides BI cover for fire, wind, hail, vandalism, or damage from vehicles or aircraft. Losses from disruptions caused by floods, earthquakes, downed power lines, or broken glass, along with partial closures, however, are not covered. Nationwide’s BOP suits companies with fewer than 100 employees and less than $5 million in revenue. It has a solid score in terms of customer satisfaction and an A+ financial stability rating.

Read more: Nationwide research: Middle market business owners rely on their insurance agents

4. State Farm

Designed for businesses involved in food services, State Farm’s BI cover was picked as the best for restaurants. The policy covers income losses stemming from sewer or drains backup, and food spoilage or contamination. It also protects businesses ordered closed by the government due to food contamination and pays out for any resulting advertising expenses. State Farm logged the highest possible rating for financial stability at A++ and the second-highest customer satisfaction score in J.D. Power’s survey.

5. The Hartford

The Hartford’s business interruption policy boasts several features that businesses specializing in the care of outdoor spaces need, earning the best for landscapers title from Investopedia. These features include herbicide and pesticide application coverage and snowplough operations insurance. The Hartford’s BI policy also provides cover for fire, wind, and theft, and offers bundling discounts. The insurer holds an A+ rating for financial stability.

Read more: The Hartford: How we’ve stayed connected with our small business customers during COVID-19

6. Travelers

Travelers’ business income and extra expense (BIEE) policy offers protection that businesses in the professional services sector need – including coverage for the loss of valuable papers and records, computer equipment, and data and media – making it the best pick for the industry. Companies can also add dependent properties coverage – which replaces business income when a major supplier is disrupted – and extended business income coverage to cover the period after the business reopens but customers have not fully returned. The policy covers several perils, including fire, theft, damage from vehicles, and acts of vandalism.