How is Business Interruption Compensation Calculated?

With many businesses put on hold due to COVID, wildfires and other unexpected incidents, many business owners are scrambling to search their policy for business interruption insurance. This insurance can compensate a business for money lost while the business is unable to operate normally due to government mandate, environmental disaster and more.

But how does business interruption work and how is compensation calculated?

Key Factors to Business Interruption

There are three key ingredients to calculating business interruption insurance: the number of hours or days the business is unable to operate, the quantity of goods normally produced or sold within this time, and the value of each production unit. If you multiply the time by the quantity and the value, you can usually get a good estimate of what your business interruption insurance compensation will be.

This can be complicated depending on your industry and how long your business remains unable to operate. Many business interruption coverages have a set limit on how long you can receive compensation, after which you will have to find a way to pay for losses out of pocket.

Determining the quantity of goods normally produced or sold is one of the most difficult parts. If production or number of items sold varies, it can be difficult to find an even middle ground in which you can receive compensation. A claims adjuster from the insurer will generally investigate your claim and consider the anticipated production against the history of your production or sales. From there, they can estimate how much you were set up to sell or make depending on the value of each unit and how much you were in line to produce or sell.

Proving Loss for Business Interruption

One of the trickier parts about actually filing a business interruption claim is proving loss. When you know that you will be losing money, it is difficult to ask for help unless you have already suffered that financial loss. Proof can be provided through meetings and statements as well, however. Always make sure to keep an accurate record of your business’ sales and production periods so you can easily point your insurer in the direction of your losses. Trying to get more money by insisting that your projected earnings were much higher than previously may lead to skepticism, however, and won’t necessarily help your business obtain more compensation for losses.