In operating in the Cannabis space, the need for a Business Interruption cover is of utmost importance, especially considering the intensive capital investment and potential loss of income.
The business interruption insurance policy can cover a huge chunk of the cannabis sector, including; Landlords, Manufacturers, Dispensaries, Processors, Cultivators, Retail Stores and Wholesalers.
This insurance, also known as Business Income Insurance generally covers the loss of an income suffered by a business in case of a disaster. This loss of income may be caused by the actual closing of the business facility or by the rebuilding process occasioned by the disaster.
Business Interruption Insurance is mostly part of a Business Owner’s Policy (BOP), that will usually also include property insurance and general liability.
It can also be added to a businesses’ commercial property insurance policy.
Business Interruption insurance differs from property insurance by what they cover. Property insurance covers the physical damage to the business while Business Interruption covers profits the business would have earned if it remained operational.
This extra provision in policy, applicable to all business types, is designed to have the business at the financial position it would have been had no loss occurred.
So, what does this mean for your cannabis business?
No matter the method you use to acquire this cover, it’s important to understand which costs and losses it will reimburse you for and what expenses you will need a different kind of policy to cover.
Let’s get this started!
What is covered?
As mentioned above, Business Interruption Insurance ties into your property insurance, which means that perils and events covered under your BOP will also covered by your Business Interruption policy.
The interruption needs to be significant before you can expect this coverage to kick in. Don’t expect to get paid if you only experienced a power outage for a couple of days.
This is what is covered:
Loss of Revenue or profits: Business interruption insurance compensates lost revenue for up to a year. What is paid out is based on your recent months’ financials.
Fixed costs including rent: This covers both operating expenses as well as still being incurred despite the closure of your business. You don’t expect your landlord not to ask for his rent, or your employees their salaries. This is covers here bases on your historical costs.
Loans: Covers your business loans while your non-operational.
Taxes: Business interruption insurance covers both your quarterly as well as your annual taxes where necessary.
Permanent Relocation: If for some reason the premises you once occupied in uninhabitable an you have to move, Business Interruption Insurance will cater for this by paying your moving costs and rent for a period of time on your new location.
This only applies for a permanent move. If you need to relocate temporarily, this is covered by a different policy we will discuss later in this article.
This coverage typically kicks in at the point the disaster occurs and stops the day physical repairs are complete and the business has been restored to its previous operational state. This however is usually determined by individual insurance policies.
An illustration of how this cover would apply in the cannabis sector in the case of a fire at a cannabis processing facility which causes damage to the building and its contents, including equipment.
Property insurance would pay for the buildings’ damage and all the equipment and content.
Business interruption insurance would handle any profits lost for the duration the business remained closed for repair.
An important note is that Business Interruption Coverage only applies to perils covered under its relating Property Insurance Policy.
What Doesn’t It Cover?
In case it is necessary for your business to shut down due to extensive property damage, it is very important to be clear on which insurance policies will cover which losses.
Business interruption insurance will not cover material property damage, as it is designed to cover financial losses.
Simply put, business interruption insurance does not cover costs covered under your commercial property and general liability policies which include injuries, third party damages and commercial property damage.
In a nutshell, business interruption insurance will provide you the financial support needed to get your business back on into operations as your property is being fixed after a disaster. It will also ensure you do not miss out on your profits for that duration.
What is The Importance of a Policy’s Restoration Period?
Each business interruption policy holds a “designated restoration period”, which defines the period of time your policy will give you financial support in the course of covered claim. While putting your “business interruption policy plan” in place, ensure that you clearly understand the exact time frame of when your restoration period begins and when it ends. Ordinarily, it will be a period of 12 months and can generally not be extended.
There is even better news!
You should expect to continue receiving your coverage benefits for a full 12 months, even in the event that your policy expires.
However, should the repair not be done and your business nor restored after those 12 moths, you are on your own. Once the restoration period ends, reimbursements for things such as lost income and operational expenses will cease, so it is important to organize yourself accordingly.
Other important riders linked to Business Insurance
Extra Expenses Coverage: We have mentioned this earlier in the article. Extra Expenses coverage is often added as a commercial property policy rider although it can also be acquired in a package along with business interruption. Another option is to acquire it separately.
While business interruption will cover regular expenses incurred during the closure of your business, extra expenses insurance will cover the “non-ordinary” costs.
For example, choosing to run your business from a different location during the period of repairs would require resources.
Extra expenses insurance in this case would cover:
- Moving to the temporary site
- Renting equipment needed at that temporary site
- Employee overtime payments
- Hiring additional employees
Extra Expenses coverage is ideal in cases where it is easy to relocate a business and continue serving customers.
Contingent Insurance: This Insurance Coverage kicks in to support you in case a different entity you rely heavily on to run your business experiences damage. This could be a major customer, supplier or manufacturer.
This coverage will reimburse your business the lost profit and operational costs for the period your business is unable to operate due the in operation of the business you rely on.
This type of policy cites the property in question as a “dependent property,” that is operated or owned by a pertinent third party whose operations are integral to the operations of the policyholders business.
I hope we have outlined the utmost importance of acquiring Business Interruption Insurance for a cannabis business; it could be the difference between recovering from a disaster and going under because of not being operational and accumulated debts during the period of repairs.
Needless to say, a lot has to be considered and it could get complex. If you need help, you can reach us for assistance at any time.