Interruption, Key People, and Outside Capital
Business income needs physical damage. Business-income (business-interruption) coverage pays lost profit and continuing expenses while you rebuild after a covered loss at your premises — the fire, the burst pipe, the storm. The trigger is “direct physical loss of or damage to property,” and the pandemic taught every owner what that phrase leaves out. Courts rejected COVID-19 shutdown claims almost uniformly. In California, Another Planet Entertainment, LLC v. Vigilant Insurance Co., 15 Cal. 5th 1106 (2024), held that the virus’s presence on a property generally does not cause the “distinct, demonstrable, physical alteration” the policy language requires. If your income depends on a single supplier’s or customer’s facility, ask for contingent business income coverage, which responds to physical damage at their premises. For a service practice with no premises that matter, the coverage is close to irrelevant: the business stops when you do.
Insure the person, not the building. That is the real interruption risk for most readers, and two policies carry it. Business Overhead Expense insurance pays the rent, staff, and other fixed costs while a disabled owner recovers (section “The Contract Terms That Actually Matter at High Incomes”). Key-person insurance — life and disability cover owned by and payable to the business — pays to recruit a replacement, steady a lender, or wind down in order. Its life premiums are not deductible (IRC §264(a)(1)), and the death benefit above the premiums paid is taxable unless the insured signed the IRC §101(j) notice and consent before the policy was issued (section “Taxation of Life Insurance”). With a co-owner, the same insurance funds the buy-sell agreement — as a cross-purchase, not a company-owned redemption, after Connelly (section “Buy-Sell Agreements: Fixing Value and the Connelly Trap”).
Outside capital brings D&O. Take a priced round and D&O becomes a covenant: the NVCA model investors’ rights agreement has the company obtain a directors-and-officers policy within 90 days of closing, on terms the board approves, often with key-person insurance on the founders alongside it. If you are the one taking a board seat, get the binder before the first board meeting rather than on day 90. For the founder it is personal coverage: it defends you when shareholders, creditors, employees, or regulators sue the people who ran the company. The terms that matter are the ones covered for outside directors in section “Professional Liability and Board Service Coverage”: Side A, which pays you directly when the company cannot indemnify you — because it is insolvent, or because corporate law bars it from paying a derivative-suit settlement — and the insured-versus-insured exclusion.
A sale ends the coverage twice. D&O is claims-made. The change-in-control clause in the company’s own policy freezes it to acts before closing and lets it lapse at the end of the policy term, and the acquirer’s policy excludes whatever a subsidiary did before it was acquired. Your pre-closing decisions are covered by neither. Write a run-off (tail) on the existing policy into the merger agreement, bound at closing. Six years is the market term, and the premium is capped at a multiple of the current annual premium, most often 300% — Texas Instruments’ 2026 agreement to acquire Silicon Labs is typical: the target buys “a six-year ‘tail’ prepaid policy” and the buyer’s exposure stops at 300% (merger agreement §5.9(c)). In the sale of a venture-backed private company, the tail is often booked as a transaction expense and comes out of the sellers’ proceeds, which is to say yours.