Does business interruption insurance cover partial shutdown?

What happens if your business suffers property damage or a supply chain disruption and is forced to stop operations either fully or partially? Will your insurance cover the work stoppage or slowdown?  

It’s important to understand how your insurance can protect you from the resulting financial loss. In addition to potential recovery for property damage from your property/casualty policy, you may be able to recover lost revenue from your business interruption coverage. If your operations are disrupted - completely or partially - the language of your policy will determine if, and for how long, your insurance company will cover the loss.

In the best scenario, your insurance should cover income loss not only when operations are completely shuttered, but also when your business is partially suspended.

Historically, many business interruption provisions required a "necessary suspension" of operations. The problem is that these older policies and forms did not define "suspension" or state whether a complete shutdown was necessary. Courts have wrestled with this issue, and have often come down on the side of a "complete shutdown."

The precedent in California is the case of Buxbaum vs. AETNA Life & Cas. Co., which held that a "necessary suspension" of operations "connotes a temporary, but complete, cessation of activity." 

In this case, the court said that business interruption coverage for a law firm was not triggered because there was no complete cessation of operations when evidence showed that its attorneys continued to bill hours following a water damage incident in its offices. 

The key here is that if "suspension" is not defined in a policy, the policyholder will likely not recover lost income due to a partial cessation or slowdown of business.

The catch-22 in this type of interpretation is that the business interruption policy will usually include a clause obligating the policyholder to mitigate losses.

Slowdown coverage in new forms

In light of other states' court decisions that were similar to the California case, the industry has developed new forms that also cover slowdowns. 

One such form is the Insurance Service Office-approved "Business Income (and Extra Expense) Coverage Form." It was updated to define "suspension" as "[t]he slowdown or cessation of your business activities."

Fortunately, most insurance companies use forms that affirmatively state the policy "shall cover the loss resulting from complete or partial interruption of business." 

If you are renewing your business interruption policy or purchasing a new policy, ask us if the form the insurer uses includes the above language. If not, we can find an insurer that includes such wording.
​
That specific language can ensure that you get paid for any lost business income due to a partial shutdown of your operations.