What Is Business Income Insurance, and Do You Need It?

Business income insurance, also known as business interruption insurance, provides coverage for lost income when a business must close temporarily.^[1] Lost revenue can be a significant risk for small businesses, making this insurance highly valuable for companies that don’t have large cash reserves.

Despite the added expense, this insurance can be worthwhile — especially for businesses facing significant risks. Here’s what to know about business income insurance, coverage options, costs, and business income insurance companies.

What is business income insurance?

All businesses face some level of risk. If your company has a physical location, like an office, factory, or storefront, you face the possibility that certain events could force you to close for a time. For instance, if your office building catches fire and forces you to temporarily close your business, business income insurance can cover your lost income during repairs.

Typically, you’ll buy business income insurance as part of a business insurance package. BOPs usually include business property coverage and general liability insurance. You can add business income insurance as an optional coverage for an additional premium.

You may also need other types of business coverage, such as commercial auto insurance or errors and omissions.

How does business income insurance work?

Business income insurance helps pay your fixed expenses, like rent and employee wages, if a covered event forces you to stop operating out of your usual business location. Situations that can trigger business interruption coverage include fire, vandalism, damage from hail, ice, or snow, falling objects, explosion, and wind damage.^[2]

You’ll file a claim with your business insurance company. Most policies will have a waiting period of up to 72 hours before your “restoration period” begins.

The restoration period is the length of time your policy will pay out business income benefits. During that time, your business property insurance can help pay for repairs or restoration, while your business income insurance helps cover your expenses and lost revenue.

What business income insurance covers

Business income insurance policies can vary, but they generally cover lost revenue and recurring expenses. Here’s a breakdown of what they usually cover:

• Lost income: Your policy will cover your lost net income, not your gross income.

• Continuing expenses: Rent, taxes, and loan payments are all eligible for reimbursement.

• Payroll: This coverage pays for payroll expenses during the restoration period.

• Rent or mortgage payments: This covers rent or mortgage payments for your place of business.

• Taxes and loan payments: This coverage may pay taxes and any ongoing loan payments during the restoration period.

• Extra expenses: If you must relocate during repairs, your policy may cover relocation and other extra costs.

Remember, though, that business income coverage has specific criteria for when a policy will pay and when it won’t. The following table shows examples of when this coverage would kick in.

Coverage	Triggering Event
Lost income	A kitchen fire forces a restaurant to shut down.
Falling object	A tree branch falls through the roof of an office, causing damage that will take months to repair.
Lightning	Lightning strikes your building and fries electrical systems.
Vandalism	Vandals break your windows and cause other damage.
Wind	Wind blows shingles and siding off your building, causing you to close for a time.

What won’t business interruption insurance cover?

While business interruption insurance provides coverage in many situations, it doesn’t cover everything. Policies vary, but typical exclusions are:

• 

  Physical damage to a property

  If you have physical property damage, business interruption insurance generally doesn’t provide reimbursement for the repairs. Your business property insurance would pay for repairs.

• 

  Flood or earthquake

  Policies typically don’t cover business interruptions due to floods or earthquakes.

• 

  Pandemics

  Business interruption insurance usually won’t cover an outbreak of disease, such as with COVID-19.

• 

  Power outages not tied to covered damage

  Your policy won’t cover a power outage that occurs off-site.

• 

  Undocumented income

  Your insurer will only cover the income you’ve documented.

If you’re not sure what your policy covers, check your policy documents. They’re the best place to find specific information.

Options, extensions, and endorsements for business income insurance

You may find that your business faces risks that your business income insurance doesn’t fully cover. Just as you can customize home, life, or auto policies through riders, you can do the same for business income insurance.

Common business income insurance extensions include:

• Extended business income: This coverage supplements or replaces reduced income after your business reopens.

• Cyber business interruption: Cyber business interruption insurance can kick in if a data breach, ransomware attack, phishing, or other cyber vandalism forces you to shut down. You may be able to buy this coverage as an add-on to your existing business income insurance policy, or you may have to buy it as part of a cyber insurance policy.^[3]

• Business income for dependent parties: Also known as contingent business income insurance, this covers lost revenue due to damage to non-owned property. For example, if a vendor’s warehouse burns down, causing a supply chain disruption, your revenue losses would fall under this coverage.

• Extension for off-premises utility services: This provides off-premises utility services coverage. For example, if your electricity supplier experiences a failed grid, this coverage would help cover your lost revenue while you’re without power.

• Civil authority coverage: If a government order prevents you from having access to your business, this coverage kicks in. For example, in the aftermath of a storm, authorities may deny access to flood-damaged buildings. Some business interruption policies will automatically include this coverage, while others may allow you to add it with a rider.

How much business interruption insurance do you need?

Your policy’s business interruption limits should cover your monthly net profits and ongoing expenses for the period it would take to restore your business. Freelancers, contractors, and small businesses must be able to cover operating expenses like rent, payroll, and utilities during downtime. If your coverage limits fall short of your actual costs, you’ll end up paying more out of pocket.

These general steps can help you estimate how much coverage you need:^[4]

1. Calculate your average monthly gross revenue, minus variable costs.

2. Include fixed expenses, such as rent, payroll, and utilities.

3. Estimate restoration time (for example, three to six months).

4. Add monthly revenues and fixed expenses.

5. Multiply this by the number of restoration months to determine the total coverage you need.

Here’s how the calculation might look:

Step	Amount
Monthly revenue - variable costs	$28,000 - $5,000 = $23,000
Fixed expenses (rent, payroll, utilities)	$15,000
Total fixed expenses, variable costs, and revenue	$23,000 + $15,000 = $38,000
Estimated restoration period	4 months x $38,000 = $152,000
Estimated business income insurance limit	$15,200

How much does business income insurance cost?

Many variables affect how much you’ll pay for a business interruption policy. But broadly, you’ll pay between $40 and $150 monthly, or $480 to $1,800 annually. Business owners often bundle this with a business owners policy, which typically costs about $57 per month.

While these are general ranges, several factors affect the cost of business income protection, including:

• Industry risk: If your business operates in an industry with higher risks, you’ll likely face higher premiums. Performing risk assessment can help estimate your industry’s risk level.

• Physical location: Your business location directly affects weather and vandalism risks, which can both raise premiums. State regulations can also affect premiums.

• Revenue and coverage limits: Since your policy limits will need to cover your net income for months at a time, the higher your income, the higher your policy limits. And higher policy limits typically mean higher premiums.

• Business size: A larger business will have a larger payroll and expenses, so you’ll need a higher coverage limit with a higher premium.

• Claims history: If your business has a history of filing business insurance claims, you could face higher premiums.

• Add-on coverages: Various add-on coverages can increase the overall cost of your business insurance.

Because the cost of business income insurance can vary widely, it’s a good idea to get multiple quotes and compare per-month premiums versus covered income.

How to get business income insurance

After you’ve assessed your needs and gathered your financial information, it’s time to request and compare quotes. Here are the general steps to follow:

1. Review revenues and expenses. This will help you estimate how much coverage you need.

2. Determine the desired restoration period. Ensure you’re covered for the entire duration.

3. Choose your coverage limit. After determining how much an interruption would cost, choose a policy with a large enough payout.

4. Get quotes from agents or online platforms. Obtain multiple quotes to see more than one price.

5. Compare endorsements, exclusions, and prices. Compare prices, but don’t forget to consider necessary add-ons and check policy exclusions.

6. Purchase a policy and request a certificate. After settling on the best policy, purchase it and request a certificate of insurance.

As a final step, make sure to verify the policy with your landlord or lender so you know there won’t be any issues later.

Business income insurance FAQs