When it comes to manufacturing, keeping operations running smoothly is everything. But what happens when a disaster happens and production stops? That’s where
business interruption insurance comes in. For manufacturers, this coverage can be the difference between a temporary setback and a long-term financial crisis.
How Business Interruption Insurance Works
Business interruption insurance is designed to cover
lost income and extra expenses when your operations are disrupted due to a
covered cause of loss. Coverage only kicks in if there is physical damage at your insured location—for example, fire damage, storm damage, or another insured peril that forces a slowdown or complete halt in production.
Smaller manufacturing companies often carry this protection within a
Businessowners Policy (BOP) or Commercial Package Policy on an
Actual Loss Sustained (ALS) basis. This means it pays out for the actual income you lose, without a preset dollar limit. Larger manufacturers, however, may need policies with
specific coverage limits, since insurers don’t always offer ALS on bigger operations.
Key Factors to Review in Your Coverage
- Period of Restoration – This defines how long your policy will cover lost income and expenses. Some policies cut off sooner than expected, so make sure the time frame realistically matches how long your business might need to recover.
- Recovery Time – Many manufacturers underestimate how long it takes to repair or replace specialized equipment, secure raw materials, or get supply chains back online. Consider the
worst-case scenario, not the best.
- Utility Service Interruption Coverage – If a loss of power, water, or gas would stop production, make sure your policy includes this endorsement.
- Extra Expense Coverage – Expenses like renting temporary space, outsourcing work, or expediting shipments may not be automatically included. Having them covered can speed up your recovery.
- Contingent Business Interruption – If you depend on a handful of key suppliers or major customers, their shutdown could affect you too. This coverage helps protect against those ripple effects.
- Employee Wages – Many manufacturers want coverage that allows them to keep skilled employees on payroll during downtime. Losing your team and having to rehire and retrain can be even more costly in the long run.
Common Exclusions to Watch For
Not all events are covered.
Floods, earthquakes, and some other disasters may be excluded unless specifically added to your policy. Carefully review your policy’s exclusions and endorsements to ensure you’re protected against your biggest risks.
Planning Ahead: Estimating Coverage Needs
One of the most overlooked parts of business interruption insurance is properly estimating how much coverage you actually need. Ask yourself two questions:
- What is the monthly amount I’d need to survive a shutdown?
- How many months of coverage would I realistically need?
Regularly reviewing your financial records and updating your coverage helps ensure you won’t be left short if disaster strikes.
Final Thoughts
For manufacturers,
business interruption insurance isn’t optional—it’s essential. From equipment breakdowns to supply chain disruptions, downtime can quickly spiral into lost contracts and long-term financial damage. Reviewing your coverage carefully, considering extra expenses and contingent risks, and planning for worst-case scenarios can help ensure your company weathers the storm and comes back stronger.
