Understanding Business Interruption Insurance

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What is Business Interruption?

Business interruption (also known as business income coverage) insurance is a key part of any complete commercial insurance policy and can be vital to a business’s ability to remain solvent after a loss. Many businesses have coverage that will pay to repair or replace damaged or destroyed property, what some fail to take into account is the net profits and continued expenses that result during the period of restoration.

The failure to plan for this contingency often accounts for most business failures even while their buildings are being repaired. Business Interruption (BI) and Extra Expense (EE) coverage are time element coverage’s that are specifically designed to respond to the disruption of your normal business operations.

While BI will take care of a businesses lost profits the EE coverage will help provide added resources during the period after the loss to cover ongoing or new expenses like rent, taxes, mortgage payments, utility payments or temporary accommodations for your business operations. The idea is to make sure that the business is able to adequately recover the proper amount and to be able to continue as if there was no effect on the income stream. Remember to pay close attentions to the exclusions on your policy and remember that business interruption is designed to be “triggered” when there is direct physical loss to your property. On unendorsed policy’s, things like off premises power failure may not be covered – other policy exclusions like pathogen (virus) won’t be covered.

Period of Restoration:

BI is intended to compensate a business for lost income and any extra expenses that may be incurred during the “period of restoration”. This is usually defined as the period from when direct physical loss or damage occurs and ends when the damage has been rebuilt, replaced or other wise repaired. Keep in mind however that the period of restoration that an insurance company may define is the reasonable time the building or structure be repaired, replaced or rebuilt, but it will also only pay until the selected limits of BI & EE are exhausted. In other words, your building may still be in the process of being rebuilt or replaced – your BI & EE will only continue until the money runs out.

Determining the Amount of Coverage Needed:

Since the coverage is designed to pay your actual loss sustained during the period of restoration, the amount of coverage needed and the amount of time needed will vary from business to business. While there are many resources for determining how much coverage is needed, many businesses choose to use business income worksheets that outline past, current and future profit and losses as well as the potential need for any additional coverages for extra expenses.

While determining your monetary needs is pretty straight forward, determining how long you need the coverage can be much more difficult. The “maximum period of indemnity” is a term found in your insurance contract that will outline how long the insurance company will continue to pay during your period of restoration. On some policy’s you may select a monetary limit as well as what the monthly limitation of recovery each month.

Other options such as those found in BOP’s may have a 12 months, actual loss sustained period of indemnity coupled with a maximum limit of insurance you provide; while others may have a co-insurance penalty associated with the limit. It’s important to talk to your agent and have them explain the options, how they work, how long and how much you can reasonably expect to recover.

When filling out the business income worksheets keep in mind the following:

  • Are you current financial and P&L statements up to date, accurate and complete?
  • Are there any factors that may affect the business income over the next 12 months, if so – can they be quantified?
  • Does your business have a disaster recovery plan that accounts for the additional expenses associated with temporarily relocating?
  • Do you want to include ordinary payroll in your limit of coverage? What about coverage for key employee’s who could look to a competitor for work during the period of restoration?
  • Is your business seasonal? If so there are provisions that can take into consideration the fluctuations in your income as it changes throughout the year.
  • Coastal businesses that are affected by hurricanes may take longer to be repaired due to widespread damage to other buildings and homes in their community. Limitations on labor and material could affect the cost of recovery in addition to potential damages to infrastructure like roads, telephones and electricity.

Filing a Business Income Claim:

When filing a business interruption or extra expense claim, keep in mind that your insurance company will require verification of your lost income. Keeping accurate records and having off-site backups of the proper documentation (i.e. prior year’s P&L, financials, etc.) will ensure that that there will be a quick and efficient adjustment process. Also important to note is that unlike your property insurance deductible, BI & EE have a time element deductible (usually 72 hours) before coverage will begin.

Proper preparation is paramount to surviving catastrophic losses to your businesses income due to building damage or interruptions in infrastructure. Talk to your agent about how to best approach determining your needs for business income insurance coverage. Your agent should be able to provide you with BI worksheets and guidance on how to fill them out accurately based on your specific business needs and requirements. Involve your CPA or financial planner on and seek their advice on how to determine your financial needs should the unthinkable happen.

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