Business Interruption and Consequential Loss
Time-element coverage
Business interruption (BI) indemnifies the insured for lost net income plus continuing normal operating expenses during a period of restoration caused by a covered property loss. It requires a direct physical loss at the insured premises or a dependent location. Extra expense covers costs to continue operations - it does not require a shutdown.
Key concepts
- Period of restoration begins when the damage occurs and ends when the property should reasonably be repaired, rebuilt, or replaced.
- Coinsurance applies to BI, based on projected annual business income plus operating expenses.
- Extended period of indemnity covers lost income after restoration while business rebuilds.
- Contingent BI covers loss from damage at a supplier or customer location.
- Civil authority, ingress/egress, and service interruption endorsements extend the base form.
Traps to watch
- No physical damage = no BI under the standard form; a pandemic or utility outage alone does not trigger it.
- BI does not pay lost profits that would not have been earned; it pays the income the business would have earned.
- Payroll may be included or excluded depending on the form.
Rule of thumb
BI = lost net income + continuing expenses − saved expenses, limited by the period of restoration and the limit of insurance.
Worked example
A fire shuts a factory for four months. Projected monthly net income $50,000 and continuing expenses $20,000; saved expenses $5,000. Monthly BI = 50,000 + 20,000 − 5,000 = $65,000. Four months = $260,000, subject to the BI limit and any coinsurance test.