When people think of commercial property insurance policies (assuming that they ever think of them at all), they typically think of coverage for damage to buildings and their contents. For example, if a factory burns down, the property insurance policy will pay the amount needed to replace the damaged property—or at least the value of the property that was destroyed.
But most commercial property insurance policies provide additional coverage that not only insures the cost to repair or replace what has been physically damaged but also compensates the policyholder for profits lost during the period of time needed to recover from the physical damage. Thus, for example, if it takes a year to rebuild the damaged factory, and the policyholder suffers $3,000,000 in lost sales, after considering saved expenses during the rebuilding process, most property insurance policies will cover these “business interruption” (BI) losses.
The specific scope and terms of “business interruption” coverage vary from one policy form to the next, but most have similar sets of moving parts. First, there is the coverage grant. The standard Insurance Services Office Inc. (ISO) policy form promises to pay as follows:
We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. The “suspension” must be caused by direct physical loss of or damage to property at premises which are described in the Declarations and for which a Business Income Limit Of Insurance is shown in the Declarations. The loss or damage must be caused by or result from a Covered Cause of Loss.
Basically, this coverage is designed to do for the policyholder what its business would have done had no loss occurred.