Guides
Business interruption insurance: how business income coverage works
What business income coverage pays after a covered physical loss, how the 72-hour wait, period of restoration and extended income work, and where the gaps are.
Business interruption insurance, called business income coverage in the policy, replaces the net income you would have earned plus the normal expenses that keep running, including payroll, while a covered physical loss at your premises forces you to slow down or stop. It is not a general protection against a bad stretch of sales. The trigger is direct physical loss of or damage to property at a described location, caused by a covered cause of loss, and the payment runs for a defined period of restoration.
What the standard form pays
The ISO Business Income (and Extra Expense) Coverage Form, CP 00 30 10 12, defines Business Income as the net income (net profit or loss before income taxes) that would have been earned or incurred, plus continuing normal operating expenses incurred, including payroll. For manufacturers, net income includes the net sales value of production. The insurer pays the actual loss of business income you sustain due to the necessary "suspension" of your "operations" during the "period of restoration." Suspension includes a slowdown of business activities, not only a full closure.
Three conditions follow from that wording:
- Physical loss at a described premises. The location must be listed in the declarations with a business income limit. Damage at a supplier's plant or a customer's store is not the trigger; contingent business interruption insurance and supply chain risk covers that exposure.
- A covered cause of loss. Business income follows the causes of loss form attached to the policy. If fire is covered, the income lost to a fire is covered. If the building damage came from flood or earthquake and you have no coverage for those perils, you have no business income coverage for them either. See basic, broad and special causes of loss forms: what each covers.
- Actual loss sustained. The payment is based on your financial records and what the business would likely have earned, not an agreed daily amount.
Timeline of a covered loss
The period of restoration is the clock that drives the claim. In CP 00 30 it begins 72 hours after the direct physical loss for Business Income and immediately for Extra Expense. It ends at the earlier of two dates: when the property should be repaired, rebuilt or replaced with reasonable speed and similar quality, or when business resumes at a new permanent location. Two features trip up claims.
First, the measure is when the work should be done, not when it was done. A slow contractor or a delayed permit does not stretch the payment. Second, the period of restoration does not include extra time caused by enforcing a building code or zoning law, so a rebuild held up by code compliance is not paid for the delay. An endorsement (CP 15 56, Business Income Changes - Beginning of the Period of Restoration) can shorten or remove the 72 hours.
After you reopen, Extended Business Income pays the shortfall while revenue climbs back. It begins when the property is repaired and operations resume, and ends at the earlier of the date you could restore operations, with reasonable speed, to the income level that would have existed without the loss, or 60 consecutive days later. It does not cover losses from unfavorable business conditions in the area caused by the event. An optional Extended Period of Indemnity replaces the 60 with a longer number shown in the declarations.
A worked example (hypothetical)
Say a bakery has a covered fire. Net income plus continuing expenses (including payroll) would have been $14,000 a week. The 72-hour wait is about three days, or $6,000 at that rate. Repairs take 14 weeks. After reopening, sales run at half of normal for eight weeks. The owner also rents a commissary kitchen for $9,000.
| Item | Amount |
|---|---|
| Business income, 14 weeks closed ($196,000) less the 72-hour wait ($6,000) | $190,000 |
| Extended business income: 8 weeks at a $7,000 weekly shortfall | $56,000 |
| Extra expense: commissary kitchen rental, paid from the moment of loss | $9,000 |
| Total claim | $255,000 |
All three items draw on one pot. Under the form, payments for Extra Expense, Extended Business Income, Civil Authority and Alterations and New Buildings do not increase the business income limit. So if the limit is $200,000, the policy pays $200,000 of this $255,000 loss, and that is before any coinsurance penalty. Setting the limit is covered in how to calculate a business income limit.
Coverages that come with the form
| Coverage | Standard CP 00 30 10 12 terms |
|---|---|
| Civil Authority | Pays when a covered loss damages other property and a government order prohibits access to your premises, which must be within one mile of the damage. Business income begins 72 hours after the first order and runs up to four consecutive weeks; extra expense begins immediately. See civil authority coverage: when an order closes your doors. |
| Extended Business Income | Up to 60 consecutive days after operations resume, as described above. |
| Alterations and New Buildings | Covers income lost because a covered loss delays the start of operations at new or altered space. |
| Interruption of Computer Operations | $2,500 per policy year unless the declarations show more, limited to loss from destruction or corruption of electronic data by a covered cause. |
| Newly Acquired Locations | Up to $100,000 at each new location for 30 days, available only if the declarations show coinsurance of 50% or more. |
| Extra Expense | Necessary costs that you would not have incurred without the loss, to avoid or minimize the suspension. See extra expense coverage explained. |
Options that change how it pays
Several optional coverages change the mechanics. The first three remove or suspend the coinsurance condition.
- Maximum Period of Indemnity. The most paid is the lesser of the loss in the 120 days after the period of restoration begins or the limit.
- Monthly Limit of Indemnity. Each 30 consecutive days is capped at the limit multiplied by a fraction in the declarations, such as 1/4.
- Business Income Agreed Value. Based on a worksheet, it suspends coinsurance for up to 12 months or until the policy expires. See agreed value, blanket limits and margin clauses.
- Extended Period of Indemnity. Replaces the 60-day extension with a larger number.
- Payroll limitation or exclusion. CP 15 10 limits or excludes payroll from the coverage, so some or all ordinary payroll is not insured. It also changes the coinsurance test: the form deducts the excluded payroll from the operating expenses used in the calculation.
Without one of those options, the form's coinsurance condition applies: the limit is tested against the stated percentage times the net income and operating expenses for the 12 months after inception or the last anniversary. See the coinsurance clause and how underinsurance is penalized.
Gaps to know before you need the coverage
- Off-premises power and utilities. The Special causes of loss form excludes the failure of utility service that originates away from your premises. A business income loss from a regional outage needs a utility service endorsement; see utility service interruption coverage: when an outage is insured.
- Supply chain. A supplier's fire does not trigger the base form.
- Pandemics. ISO introduced a standard virus or bacteria exclusion endorsement in 2006, and many policies carry it. The COVID-19 lawsuits turned on whether closures were "direct physical loss or damage"; see What the COVID-19 business interruption lawsuits decided. That requirement is still in the form.
- Cyber events. The base form limits electronic data losses to the Interruption of Computer Operations coverage; cyber policies handle most of this.
- Flood, earthquake and sewer backup. If the physical damage is excluded, so is the resulting business income loss.
The businessowners policy version
The ISO businessowners form (BP 00 03 07 13) builds business income into the package. According to FC&S's review of that edition, the period of restoration begins 72 hours after the loss, coverage applies to loss sustained within 12 consecutive months after the date of physical loss, and the 2013 edition increased Extended Business Income from 30 to 60 days. Details vary by carrier. See What is a business owner's policy (BOP)?.
Documenting a claim
The form requires you to resume all or part of operations as quickly as possible, and the insurer reduces the loss to the extent you could resume using damaged or undamaged property, merchandise or other locations. The insurer decides the loss from your pre-loss net income, the likely net income had the loss not happened, the operating expenses needed to resume, and other relevant records. Keep monthly financial statements, tax returns, payroll records and sales by day. A sworn proof of loss is due within 60 days after the insurer asks for it. documenting a business interruption claim, from day one to final payment covers the paperwork.
Key takeaways
- Business income coverage pays net income plus continuing expenses, including payroll, but only after direct physical loss from a covered cause at a described premises.
- The standard form has a 72-hour wait before business income starts, an Extended Business Income tail of 60 days, and a period of restoration that ignores delay caused by building codes.
- Extra expense, civil authority and extended business income all draw on the same limit, so size the limit for the whole claim.
- Utility failure, supplier loss and most cyber events need their own endorsements or policies.
- Maximum period of indemnity, monthly limit of indemnity and agreed value are the ways around coinsurance; pick one on purpose.