Following a major weather event or natural disaster that results in property damage, businessowners will do all they can to get back up and running as soon as possible. In many cases however, the extent of the damage may force owners to temporarily shut down and file a business interruption claim.
Although it may not be explicitly mentioned in the policy clauses, deductibles still apply to many business interruption claims. Understanding how deductibles are utilized in these policies is a crucial technical aspect that company owners must understand when filing a claim.
How Business Interruption Insurance Works
Business interruption insurance helps compensate owners for any lost income and certain operating expenses if the company is forced to vacate the premises due to a covered policy loss. Typically, these payments begin 24 to 48 hours after the loss occurs or a deductible is paid.
Business interruption is commonly offered as a policy endorsement in most commercial property policies. These policies will commonly cover losses from fire, lightning, some windstorms, vandalism, theft and civil commotion, as well as some separately covered flood events, depending on the policy terms. Business interruption coverage does not offer compensation for losses incurred from earthquakes, pandemics, terrorism, weather-related evacuations, or loss of electricity not directly resulting from damage to the property.
There are four types of coverage typically included within most business interruption policies. These include:
- Business Income Coverage: Business income is net profit or loss before taxes and continuing normal operating expenses, including payroll. The amount of the payment you’ll receive is determined by previous sales volumes and expenses based on the business’ financial records.
- Extra Expense Coverage: Extra expenses are those above and beyond your normal monthly expenses that are expended to restore a business either at the original or at a temporary location. This coverage can also be purchased separately and could provide sufficient coverage without purchasing business interruption coverage.
- Contingent Business Interruption Coverage: This compensates for income lost due to property loss or damage at a supplier’s or customer’s location. For instance, this coverage would pay you for lost income if you own a florist shop and your main flower supplier’s business location suffers fire damage.
- Civil Authority Coverage: This coverage would pay for loss of income or extra expenses as a result of a government denying you access to your business due to a covered loss at a location owned by someone else.
Insurance Deductibles
An insurance deductible refers to the amount of money the insured will be responsible for paying on an insurance claim before coverage kicks in and the carrier starts paying. Once the deductible is paid, the insurer will pay the rest of the claim value up to the policy limits, subject to any applicable conditions within the policy language.
A deductible can be calculated either as a specific dollar amount or as a percentage of the premises’ insured value. The latter is typically more common with coverage for earthquake or windstorm damage or for properties with increased risks.
When businesses purchase insurance policies, they seek to protect themselves from unforeseen financial risks due to losses or damages. The deductible takes the financial form of the ‘risks’ the business can afford to pay for itself, which results in the insurer calculating how much to charge the business – the higher the deductible, the lower the cost of the insurance. A policy can also contain multiple deductibles.
Business Interruption Insurance Claims Deduction
For business interruption insurance claims, it’s important for policyholders to remember that deductibles may not be explicitly listed as such. Instead, there is often a waiting period before the deductibles take effect.
In most property insurance policies, a deductible is defined either by a fixed dollar amount or a percentage. For example, policies often contain a “wind/hail” deductible defined by a percentage of something, such as a percentage of the entire limit of insurance procured or a percentage of the value of the property as determined by the insurance company’s underwriters. In other situations, the deductible is set as a fixed dollar amount (e.g., $5,000, $10,000, or much higher depending on the amount of insurance and the value of the property).
These deductibles are usually applied on “per occurrence” basis. To illustrate what this means, let’s say a windstorm strikes a business, damaging its roof. The policy has a $10,000 “per occurrence” wind/hail deductible. Incredibly, one week later – before the insured can file a claim – a second hailstorm strikes a secondary covered location, causing significant damage to the roof. Unfortunately for this (very unlucky) business owner, the $10,000 deductible will apply twice: once, for the first storm “occurrence” striking the business, and again for the second “occurrence” to the secondary location. In order to be compensated under their policy, the homeowner must show the damage exceeds $10,000 for both the primary covered location, as well as the secondary location.
These “waiting periods” refer to the length of time that must elapse prior to business interruption coverage going into effect. Depending on the policy, the first 24, 48, or 72 hours may not be covered, while anything beyond that period of time may be considered a covered loss. On the other hand, coverage may extend retroactively to the initial time of loss, including the waiting period for some covered events. Additionally, in some policies the “waiting period” does not apply to any extra expenses – making it important to have a good understanding of the policies terms. Having an experienced commercial insurance claims attorney interpret the policies and the clauses within them can help.
It is important to note that the policy does not always list the waiting period as a “deductible” per se, but it functions as one. Essentially, because the waiting period is a condition precedent to coverage for business interruption insurance, some have argued that a waiting period is, in fact, a deductible. One such instance occurred in a 2006 case where California wildfires led to evacuation orders for several towns. The policyholder in that case closed its business and claimed it lost revenue during and following the evacuation period. The claim was denied, as the business was not closed for the 72-hour period necessary to activate the insurance.
Commercial Property Insurance Claim Attorneys
Having to shut down your business due to unforeseen property damage can be devastating. Although business interruption policy endorsements can offer some relief, business owners must understand the ins and outs of their coverage to ensure they are compensated properly. At Raizner Slania, our seasoned team of commercial property insurance claim attorneys have a wealth of experience in deciphering policy terms and ensuring valid claims are honored to the fullest extent. Contact our office today to learn more.
