What is business interruption insurance and why should a small business owner buy it?

Business interruption insurance (BI) replaces the revenue a business would have earned during a covered shutdown and helps cover ongoing expenses—rent, payroll, loan payments and extra costs to get back up and running. For small businesses with tight cash reserves, BI can be the difference between surviving a disaster and closing permanently.

Drawing on work with more than 500 small-business clients, I’ve seen BI restore cash flow after fires, utility outages, supply-chain interruptions and civil-authority closures. However, BI policies vary widely. Understanding triggers, limits, timelines and exclusions is essential to buying coverage that actually protects your business.

How BI coverage usually works

  • Covered cause of loss: BI only pays if a covered physical loss or specified event interrupts operations (for example, fire damage to a leased storefront). Many policies exclude flood and earthquake unless you buy endorsements or separate policies. (See Insurance Information Institute.)
  • Waiting (or elimination) period: A policy often has a waiting period—commonly 24–72 hours—before benefits begin. This is similar to a deductible measured in time, not dollars.
  • Indemnity (period of restoration): The insurer pays for losses during the policy’s period of restoration, which starts when the property is damaged and ends when reasonably restored. Some policies set a time cap (e.g., 12 or 24 months).
  • Loss calculation: Insurers typically calculate lost income using historical revenue and net profit methods, adjusted for trends and saved expenses. Accurate, historical bookkeeping dramatically speeds claims and improves settlement accuracy.
  • Extra expense coverage: Pays reasonable additional costs to avoid or reduce the period of restoration (temporary relocation, expedited shipping, equipment rental).
  • Contingent BI: Covers losses when a supplier, customer or key location is damaged and your business suffers as a result. This is critical for businesses dependent on a narrow supplier base.

(Authoritative sources: U.S. Small Business Administration; Insurance Information Institute.)

Typical coverages and common exclusions

Included (commonly):

  • Business income (lost revenue and profits)
  • Payroll and certain employee benefits
  • Fixed costs (rent, utilities, loan payments)
  • Extra expenses to minimize the interruption
  • Civil authority coverage for mandatory closures following a covered loss to nearby property
  • Contingent business interruption for key suppliers or customers

Common exclusions or limits to watch for:

  • Flood and earthquake—usually require separate policies
  • Damage from poor maintenance or wear and tear
  • Pandemic exclusions or limited coverage depending on insurer and timing (many insurers updated pandemic language after 2020)
  • Sublimits for sources like off-premises utilities or data breaches

(See detailed guidance from the U.S. Small Business Administration: https://www.sba.gov and the Insurance Information Institute: https://www.iii.org.)

Important policy features and endorsements to consider

  • Extended period of indemnity: Extends payments beyond the period of restoration for lost sales while customers return.
  • Civil authority extension: Confirms coverage if a government order prevents access to your premises after nearby property is damaged.
  • Contingent business interruption (suppliers/customers): Vital if you rely on single-source suppliers or major buyers.
  • Extra expense endorsement: Ensures you can pay to move or adapt operations to shorten downtime.
  • Business interruption for utility services: Some policies limit or exclude off-premises utility interruptions—get clarity on what is covered.

How insurers calculate a claim (practical steps)

  1. Document the date and cause of loss carefully.
  2. Preserve financial records: sales journals, tax returns, bank statements, payroll records and inventory reports. Insurers base settlements on historical performance adjusted for changes that would have occurred absent the loss.
  3. Track extra expenses separately (receipts, invoices, timesheets).
  4. Work with your insurer and, if needed, hire a public adjusting firm or forensic accountant experienced in BI claims to maximize recovery.

In my practice, claims that were documented daily and tied directly to pre-loss accounting lines settled faster and with fewer disputes.

Cost considerations and underwriting factors

Premiums reflect industry risk, location, loss history, revenue size, policy limits, waiting period length and whether the policy includes contingent coverage. High-risk sectors—restaurants, manufacturing, hospitality, retail—typically pay more. To reduce premium, some businesses accept longer waiting periods, lower limits or buy coverage only for extra expense rather than full business income.

When BI is most essential

  • Businesses with low cash reserves (less than three months of operating costs)
  • High fixed-cost structures (rent, equipment leases, debt service)
  • Supply-chain dependence on a limited number of vendors
  • Industries with higher physical-loss frequencies (restaurants, light manufacturing, retail)

Real-world examples (anonymized)

  • Fire at a manufacturing plant: A client’s factory was closed six months after a fire. Their BI policy paid payroll and loan payments and covered extra shipping to fulfill limited orders from a temporary production site. They retained employees and recovered market share after reopening.

  • Civil authority shutdown for contamination near a retail strip: A boutique couldn’t open for three weeks under a city order. Civil-authority coverage under their BI policy replaced lost income while the owner worked with the landlord to repair the neighboring unit.

  • Home-based business interruption: Home-based firms have unique exposure—homeowner policies may not cover lost business income. Owners need business-specific BI or endorsement for home-based operations (see our guide on Business Interruption Insurance for Home-Based Businesses).

Practical buying checklist

  • Match limits to a conservative worst-case scenario (12–24 months of coverage where feasible).
  • Verify the waiting period and whether it’s per event or aggregated.
  • Ask about sublimits and exclusions (utility interruption, suppliers, data breach).
  • Confirm whether payroll is covered and any caps on payroll amounts.
  • Keep contemporaneous financial statements and a disaster plan that documents alternate locations and suppliers.
  • Reassess coverage annually as revenue and expenses change.

For owner-families planning continuity strategies, integrate BI into a broader continuity plan: insurance, emergency loans, and succession contingencies. Our article on Business Interruption Planning for Owner-Families explains how to coordinate insurance with family and ownership planning.

Common mistakes to avoid

  • Underinsuring: Setting limits based on optimistic, short-term forecasts rather than conservative, historical averages.
  • Overlooking endorsements: Assuming BI automatically covers supply-chain or civil-authority losses.
  • Poor record-keeping: Weak or missing documentation lengthens claims and reduces recovery.
  • Ignoring tax and loan implications: Insurance proceeds can affect taxes and loan covenants—consult your CPA and lender.

Tax and loan-treatment considerations

Insurance proceeds for lost business income are generally treated as taxable income; however, the details depend on how the insurer structures payments and tax accounting rules. Consult a qualified tax advisor for specific treatment. Also notify lenders early—loan covenants may require lender consent for use of proceeds or repayment terms.

(See SBA disaster loan and insurance guidance: https://www.sba.gov.)

Final professional tips

  • Run a BI claim drill: simulate a covered shutdown and follow steps to gather records, notify carriers, and calculate lost income.
  • Use a broker who specializes in your industry; they can negotiate appropriate endorsements and limits.
  • Maintain a prioritized list of alternate suppliers and temporary locations in writing.

Professional disclaimer

This article is educational and does not constitute legal, tax or insurance advice. Coverage needs vary by business and jurisdiction; consult a licensed insurance agent or broker, a qualified tax professional and your attorney to tailor coverage and understand state law. Author opinions above reflect professional experience working with small businesses but are not a substitute for individualized advice.

Authoritative resources