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Whether you operate a neighbourhood restaurant or oversee a large manufacturing facility, your ability to generate income depends on remaining open and operational. But a fire, water damage or severe weather event that affects your premises can interrupt that activity and force your operations to pause.
When that happens, revenue may decline or stop altogether while repairs are completed. At the same time, expenses such as rent, loan payments, utilities and certain payroll costs may continue. And for many businesses, that type of interruption can be difficult to absorb.
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Business interruption insurance, sometimes referred to as business income insurance, helps protect your business against the financial impact of lost income following a covered property loss. It is typically added to a commercial property policy rather than purchased on its own.
While commercial property insurance helps repair physical damage caused by a covered loss, such as fire, wind, theft or certain types of water damage, business interruption coverage is designed to handle what happens next. It may provide financial support during the defined restoration or indemnity period, which is the length of time that a policy will help pay for lost income and expenses while the business is being restored. This period will be outlined in your insurance policy.
Running a business requires planning for both growth and unexpected events. That’s why BrokerLink works with businesses of all sizes across Canada to help them manage interruption risk.
Business interruption coverage is especially important for any business that relies on remaining open and operational, such as:
Restaurants and cafés
Retail stores
Trades and contractors
Manufacturers
Professional services
Auto repair shops
Property managers
Hospitality businesses
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Any business that relies on a physical location, steady customer traffic or specialized equipment to generate income can be affected by an unplanned shutdown. Even just a few weeks of income loss can be difficult to absorb for many Canadian businesses.
Without business interruption coverage, the responsibility for replacing lost income and covering ongoing expenses would generally fall to the business owner. But with the right business interruption policy in place, it can help you manage that risk.
If you’re unsure how your existing policy responds after a covered loss, a licensed BrokerLink advisor can help.
Standard business interruption insurance can be structured in different ways depending on how your business operates and how your commercial property insurance policy is written. While policy wording varies, here are some of the common types of coverage available to Canadian businesses.
Lost business income
Ongoing expenses
Extra expenses
Extended business income coverage
Contingent business interruption coverage
Civil authority coverage
The primary reason for business interruption insurance is to help offset lost net income when a covered event causes direct physical damage to your insured property and forces you to suspend your operations temporarily.
In addition to lost income, most business interruption policies help cover ongoing expenses that continue during a shutdown while your income has stopped, such as:
Rent or lease payments
Loan obligations
Utilities
Property taxes
Employee wages
This coverage can also help pay for reasonable additional costs incurred to minimize the interruption or continue operating after a covered loss. Including this in your business interruption insurance can reduce the overall interruption loss by allowing your operations to resume sooner. These additional costs may include:
Renting a temporary location or equipment
Setting up temporary office space
Paying overtime to employees
This insurance coverage can also provide stability during longer restoration periods. For example, if your repairs take longer than expected due to supply chain delays or permitting requirements. Even after repairs are complete, your revenue may not immediately return to pre-loss levels. Customers may take some time to return and production may ramp up gradually. Business interruption may provide continued support for lost income during an extended period after reopening, depending on your policy wording, for a defined and limited period as outlined in your policy.
Some businesses depend heavily on key suppliers, manufacturers or customers to generate income. If a covered event damages their property and disrupts your operations as a result, your own premises may be unaffected, but your income may still decline. Depending on the terms of your policy, this coverage may help replace your lost income.
Some business interruption policies may include limited coverage when a government authority restricts access to your premises due to nearby insured property damage caused by a covered peril. For example, if a fire damages a neighbouring building and authorities close the surrounding street for safety reasons, your business may be unable to operate even if your own property was not directly damaged. Subject to the terms of your policy, it may help offset your lost income while your access is restricted.
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Business interruption insurance cost is influenced by several factors, including your revenue, industry, property exposure, selected limits, number of employees and indemnity period. As such, a company that processes large daily transactions or relies heavily on specialized equipment may be rated differently from one with lower revenue or shorter recovery timelines.
The nature of your operations can affect how long it may take to recover after a covered loss. The longer the potential interruption period, the greater the insurance company’s exposure.
Insurers will review your gross revenue, net income and fixed costs to estimate your potential business interruption loss. Businesses with higher income and higher ongoing expenses will typically require higher limits, which can increase their premiums.
If you choose to expand your protection to insure all payroll during the interruption period instead of just key employees, it increases the insurer’s potential exposure, which may affect your insurance rates.
If your business operates from a facility that would take longer to repair or replace, it increases the potential length of the business interruption period, which can affect overall pricing.
If your business is located in an area with higher risks of wildfire, flood, severe weather or crime, you may face different underwriting considerations than one located where the risk is lower. Additionally, your recovery timeline may also be affected by local permitting processes, inspections or rebuilding standards.
If your business relies on specialized machinery or imported equipment, having long equipment lead times can lengthen the business interruption period, which insurers will factor into your pricing.
If you select a longer indemnity period to extend how long your policy would protect you, it will increase the length of time the insurance company would be required to cover your claim, which generally results in higher premiums.
If your business interruption policy requires certain minimum coverage levels and you increase your limits, it can affect your overall pricing, but it will also help you avoid the risk of underinsurance.
A prior business interruption claim may influence future pricing or underwriting terms, particularly if similar exposure remains.
While business interruption insurance is designed to respond when a covered loss results in suspended operations, it does not apply to every type of revenue disruption:
Business interruption insurance generally responds when direct physical damage to insured property causes a suspension of operations. If there is no covered property damage, the policy typically does not apply.
Standard business interruption policies usually require physical damage to property. As such, government-mandated closures without property damage are not usually covered unless you’ve added a specific endorsement.
Flood or overland water damage is not automatically included in most commercial property insurance policies. Therefore, if flood damage is excluded under the property portion of the policy, any business interruption resulting from it would also not be covered unless appropriate coverage has been added.
If power or utilities fail due to damage away from your premises, coverage may not apply unless your policy includes a specific utility services endorsement and the failure results from a covered cause of loss.
Business interruption claims are supported by financial records. If income cannot be substantiated through accounting documentation, your claim payments may be affected.
Because exclusions and limitations vary by insurer and province, reviewing your existing policy with a local BrokerLink advisor is the best way to understand how your coverage would respond.
Co-insurance in business interruption insurance requires you to insure a specified percentage of your projected business income exposure, often 80% to 90%. If coverage falls below that threshold, the policyholder may share in the loss proportionally, meaning the insurer may reduce the claim payment and the remaining portion becomes the responsibility of the business.
The IBC explains that co-insurance clauses apply to business interruption coverage in the same way they apply to commercial property insurance.
If your policy requires you to insure 80% of your income exposure, but you insure it for significantly less, the insurer may only pay a percentage of your settlement for your business interruption claim.
For example, if your policy requires you to insure $800,000 in business income but you carry only $500,000 in coverage, you’re only insuring 62.5% of the required amount ($500,000 ÷ $800,000).
If you then experience a $400,000 covered business interruption loss, the insurer may apply that same 62.5% ratio to your claim settlement. This means that the payout would be $250,000 instead of $400,000, leaving your business responsible for the remaining $150,000.
With limits that accurately reflect your revenue and operating exposure, co-insurance clauses are less likely to affect your claim settlement. Therefore, it’s best to review your revenue figures regularly to help ensure your coverage still aligns with your actual exposure.
If you’re unsure whether your current limits meet your co-insurance requirements, reach out to BrokerLink.
Your business interruption limits are generally based on your income, fixed operating expenses and the length of time it would realistically take to repair, rebuild and restore your business operations after a covered loss.
Here’s how that would look as an equation:
(Average monthly gross profit × months to fully recover) + (fixed monthly costs × number of months) − (monthly expenses you can pause × number of months)
Imagine a retail store with a $40,000 average and $25,000 in fixed monthly expenses. Let’s say that a fire forces its closure for six months. After looking at repair estimates and their own monthly expenses, the retail store owner determines they will need about six months of recovery time and they can reasonably pause $5,000 worth of expenses each month.
Using the equation, it would look something like this:
($40,000 × 6) + ($25,000 × 6) − ($5,000 × 6)
= ($240,000 + $150,000) − $30,000
= $360,000 estimated exposure
It’s important to note that if repairs are delayed due to equipment lead times, supply chain disruptions or permitting requirements, their recovery period and overall exposure may increase, thus increasing the amount of coverage they would need.
Because each business operates differently, insurance providers will carefully review a business’s financial records and recovery assumptions when setting limits. A licensed BrokerLink advisor can help structure your business interruption coverage in a way that reflects your actual operating risk.
At BrokerLink, our licensed commercial insurance advisors can review your commercial insurance policy and help you determine whether your existing policy includes business interruption coverage, what it covers and whether your indemnity period is sufficient for your business.
You can reach us by phone, email or in person at any one of our locations throughout Canada. No matter how you choose to get in touch, a BrokerLink insurance advisor will be happy to assist you. We also encourage you to take advantage of our free online quote tool that can provide you with a competitive commercial insurance quote in minutes.
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The duration of coverage provided by business interruption insurance is often limited to a standard 12-month period. However, the IBC notes that rebuilding and fully restoring a business often takes longer than 12 months, particularly following a large-scale disaster. The right choice for your business will depend on how long it would realistically take to repair and return to pre-loss income levels.
Most business interruption policies include a waiting period, which is the defined amount of time that must pass after direct physical damage occurs before coverage for business interruption loss begins. This waiting period is typically 48 to 72 hours, depending on the policy.
Not usually. Most standard business interruption insurance policies require direct physical loss to trigger coverage. Pandemic-related closures without physical damage are generally not covered unless specific endorsements are included and listed on your policy.
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