Business Interruption Guide

Overview

Business interruption (BI) coverage replaces lost income and pays ongoing expenses when a covered physical loss suspends operations. Extra expense coverage funds measures to reduce downtime. Accurately defining the period of restoration and normal operations is critical.

Key Rules & Requirements

• Physical loss trigger: BI generally requires direct physical damage to covered property causing suspension of operations.
• Period of restoration: Runs from date of loss to when repairs should reasonably be completed, not when they actually finish if delayed.
• Ordinary payroll: Policies may limit payroll coverage for non-key employees to a short timeframe.
• Extended business income: Some policies cover reduced revenue after reopening for a specified period.
• Extra expense: Covers costs to continue operations (renting space, leasing equipment, overtime) that reduce overall loss.
• Coinsurance/limits: Ensure BI values are adequate; underinsurance can reduce payouts.

Step-by-Step Guidance

1. Confirm the covered physical loss and document how it caused operational suspension.
2. Define the period of restoration with contractors’ repair timelines and lead times for materials/equipment.
3. Compile pre-loss financials: 12–24 months of P&L, sales reports, payroll, and tax returns.
4. Project lost revenue using historical trends, seasonality, and booked contracts; identify saved vs. continuing expenses.
5. Track extra expenses (temporary locations, rentals, expedited shipping) and justify how they reduce total loss.
6. Provide interim calculations to request advance payments; update monthly as actuals develop.
7. At reopening, calculate any extended business income period to cover the ramp-up.

Required Documentation

• Financial statements (P&L, balance sheets) and tax returns for at least the prior year.
• Sales and production reports, bookings, and canceled contracts.
• Payroll records by employee category; note key personnel vs. ordinary payroll.
• Repair timelines, contractor schedules, and lead time communications.
• Invoices for extra expenses (temporary space, rentals, overtime, advertising to regain customers).
• Calculation worksheets showing lost revenue, saved expenses, and continuing expenses.

Common Insurer Tactics

• Narrowing the period of restoration by assuming unrealistic repair timelines.
• Applying aggressive saved-expense offsets to reduce loss calculations.
• Disallowing extra expenses that clearly reduced downtime.
• Using prior-year dips to depress projected revenues without considering current trends.
• Delaying advances pending complete final numbers.

Red Flags to Watch For

• Adjuster ignores documented lead times for materials or equipment.
• No recognition of seasonality or growth trends in projections.
• Denial of ordinary payroll coverage without citing policy language.
• Failure to apply extended business income when included in the policy.

Best Practices for Policyholders

• Engage an accountant or forensic expert early for credible calculations.
• Provide monthly updates and request incremental payments to maintain cash flow.
• Tie every extra expense to the goal of reducing or avoiding further business income loss.
• Keep detailed notes on customer impacts, cancellations, and recovery efforts.
• Review coinsurance provisions annually to avoid underinsurance penalties.

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