Construction business owners are no strangers to uncertainty.
Weather can disrupt schedules, equipment can break down and project owners'
priorities can seemingly change on a dime. But some events do more than delay a
job — they can threaten the financial stability of your entire operation.
That's why, if you haven't already, you should consider business interruption
insurance.
How coverage works
This type of coverage is a bit like disability insurance for
your business. A standard health insurance policy covers medical expenses, but
many people also choose disability coverage to replace lost income when they
can't work.
Similarly, commercial property insurance generally covers damage
to insured buildings and equipment, but it doesn't necessarily protect against
lost income or continuing expenses when business operations are disrupted.
Business interruption insurance, also sometimes called business income
insurance, can help fill that gap when covered physical property damage forces
a work slowdown or stoppage. (Note: In some cases, such coverage is included as
an endorsement to a commercial property policy rather than offered as a
separate, standalone policy.)
Depending on the terms, a business interruption policy may
compensate for lost net income and continuing operating expenses, such as
payroll and rent, during the interruption. However, losses associated with
project-specific delays may require separate coverage.
Finer points
The scope of business interruption insurance varies
significantly from policy to policy. When evaluating coverage, start with how
the insurer calculates lost business income — including net income and
continuing operating expenses. Pay particular attention to whether payroll
costs are covered and whether coverage applies to partial interruptions or only
complete shutdowns.
Another important factor is the recovery period. Subject to
their terms, policies generally cover the time reasonably needed to repair,
rebuild or replace damaged property. Some also offer extended business income
coverage for a limited period after operations resume.
Beyond these basics, consider additional protections, such as:
- Contingent business interruption coverage (sometimes
called dependent property coverage), which may cover losses resulting from
covered property damage at a project owner or supplier's location,
- Civil authority coverage, which may apply when a
government order prohibits access to your premises because of covered
damage to nearby property, and
- Extra expense coverage, which may reimburse costs such
as renting replacement equipment or operating from a temporary location.
Also, review waiting periods, coverage limits and exclusions for
events such as flooding or utility outages. For construction businesses, it's
particularly important to recognize that standard business interruption
insurance may not cover losses arising from damage to projects under
construction. Builder's risk insurance with appropriate delay or soft-cost
coverage may help address certain job-related financial losses, though these
protections often primarily benefit project owners.
Good recordkeeping
To support a business interruption claim, you'll need accurate,
up-to-date financial records. These include financial statements, job-cost
reports, work-in-progress schedules, and documentation of continuing and
additional expenses. Such records can help establish the income your
construction business would have earned had the interruption not occurred.
It's often advisable to have a forensic accountant or other
financial professional assist you in documenting and pursuing your claim. These
professionals can also help calculate your losses and substantiate the amounts
claimed under the policy. For example, historical performance, existing
contracts and industry trends may help substantiate projections of the income
your business would have earned during the interruption.
Setbacks vs. stability
No matter how carefully you manage your construction business,
you can't eliminate every risk. The right mix of insurance policies, supported
by reliable financial information, can help you weather unexpected setbacks and
maintain long-term stability. We'd be happy to work with your insurance advisor
to assess your financial exposure to potential business interruptions and
decide whether to add or revise current coverage.
