An estimated 25% of businesses do not reopen following a major disaster, according to the Institute for Business and Home Safety. Your most critical line of defense in the wake of a disaster, in terms of keeping your business solvent, is having proper and adequate insurance.

A Business Interruption Loss Insurance Primer

You have suffered a fire in your restaurant. In addition to cleaning up the mess, replacing inventory, and rebuilding, you must suspend operations. Your losses not only include physical property, but income due to lost business.

A standard commercial general liability (CGL) policy does not provide complete coverage for all business operations; however, additional and optional coverage can be purchased as endorsements to the main CGL policy. One type of additional coverage is for business interruption.

This type of insurance provides coverage to pay for loss of income as the result of a covered loss to physical property. Business interruption insurance is available for an additional premium that is based on the amount of coverage, usually the amount of annual gross receipts.

The property damage portion of CGL coverage will provide cover for the loss or damage to the property itself, and the additional coverage under the business interruption portion of the policy will pay for the loss of income based on the property damage. To make a claim under this type of coverage, three conditions must exist:

1. A necessary suspension of operations.
2. Physical damage to covered property.
3. Caused by a covered loss.

Making a claim under this type of insurance coverage demands good record-keeping. Claims under business interruption coverage require a great deal of proof and are subject to quite a bit of scrutiny by the insurance company. To substantiate this type of claim, the submission of financial records that demonstrate gross income for a similar period are examined to determine the parameters of our loss.

For example, let’s say you operate in a strip mall, and your fixtures and equipment are damaged due to smoke from a fire in an adjacent store. The property damage portion of your CGL policy will cover the losses to the building, equipment, and inventory, while the business interruption portion will cover your lost income, if any, for having to cease operations due to the damage, if you can substantiate the loss through financial records from previous years of operations.

Be aware of the limits of this coverage. Here is an example of a loss that is not typically covered. You own a restaurant in a location completely dependent on a two-lane road to bring in your customers. A series of snowstorms closes the road for three days and forces you and your staff to evacuate. The storms do not do any physical damage to your facility.

Based on the loss of business income, your customers were unable to get to the restaurant, so you make a claim under the business interruption coverage portion of your policy.

Unfortunately, the claim would most likely be denied. While your operations were suspended, your property did not suffer any type of physical damage and you cannot make a claim for the loss of income.

Commercial General Liability Insurance in Review

As you likely know, your commercial general liability (CGL) insurance covers your business against property damage, personal injury, and certain types of negligence caused by business operations. This coverage might apply if a customer falls while visiting your restaurant and is injured, if someone comes down with salmonella while dining at your restaurant and is sickened, or if a customer has an auto accident in your parking lot because it was icy after a winter storm.

Your policy covers your legal defense in the event of a lawsuit as well as damages up to the amount specified in your policy should you be found legally liable. An exclusion is a provision within an insurance policy that eliminates coverage for certain acts, property, types of damage, or locations. A standard commercial general liability policy does not cover liquor-related claims, so restaurants that sell alcohol typically add on liquor liability coverage for protection.

This policy does not cover your liability if employees are injured rather than guests; that is what workers' compensation is for. It does not cover delivery service, since it protects the place of business. As many restaurant operators learned in the pandemic, insurers do not cover COVID-related cases where guests claimed that a restaurant gave them COVID, either.

Among other exclusions to commercial generality liability to note:

• If an employee of the restaurant signaled intent to harm (i.e., initiates a fight), the resulting injuries to a guest will not be covered even though bodily injury is otherwise covered.
• Injuries or damages related to pollution, such as a chemical spill at your restaurant, are not covered.
• Auto-related injuries are not covered so you need commercial auto insurance for business vehicles.
• More broadly, anything covered by another policy (such as workers' compensation) is not also covered by CGL.

Source: RestaurantOwner.com

Editor’s note: This article is for general information only. Consult your insurance professional for information specific to your business.