Business owners generally understand they need to purchase some type of property insurance to protect their tangible assets from a loss. Stuff like inventory, displays, furniture, fixtures and equipment are at risk of loss or damage by fire, theft and host of other perils. With the proper business insurance, replacing your business property after a loss is a fairly simple process.
One of the most often overlooked types of insurance coverage is Business Income (also know as business interruption), more specifically the loss of that income should operations cease due to a covered property loss. Imagine for a moment this scenario: Your business suffers a fire loss. Your inventory, furniture, computers and other property is completely destroyed. Your place of business is completely unusable. You are looking at a cessation of operations that might last 6 months, waiting for inventory to be replaced and your business location rebuilt. Suddenly, your employees are worried about their jobs and your customers are visiting your competitors. It’s a scary scenario and yet a realistic portrayal of claims that happen every day. Fortunately, business income coverage protects you from this type of financial loss.
There are 3 specific parts of business income insurance we will focus on, taken from the ISO CP 00 03 04/02 Business Income Coverage Form:
As defined in the coverage form, business income means:
“Net income (net profit or loss before income taxes) that would have been earned or incurred and continuing normal operating expenses including payroll.”
It is important to note the coverage provides for payment of lost ”net” income, not gross income. Also included are normal operating expenses which include things like rent (location, equipment), utilities and payroll. Most policies, however, will limit payroll coverage to a shorter period of time such as 60 or 90 days after the loss.
As defined in the policy, Extra Expense means:
“Necessary expenses you incur during the period of restoration that you would not have incurred if there had been no direct physical loss or damage to property caused by or resulting from a Covered Cause of Loss”
These are costs that are not normal operating expenses but are necesarry to assist the business in resuming operations faster. Things like a temporary business location, temporary equipment, expedited shipping and extra labor are all considered covered “extra expense”.
Once your business is ready to resume operations the coverage provided by business income insurance ceases. However, that does not mean your income will instantly resume at the same amount it was before the loss happened. If your customer’s have gone elsewhere it may take many additional months to see your income restored. Extended business income coverage allows the policy to continue paying for the difference between pre-loss net income and the lower post-loss net income. As defined in the policy:
If the necessary suspension of your operations produces a Business Income loss payable under this policy, we will pay for the actual loss of Business Income you incur during the period that” (a) Begins on the date property is actually repaired, rebuilt or replaced and operations or resumed; and (b) ends on the earlier of the date you could restore your operations with reasonable speedto the level which would generate the business income amount that would have existed if no direct loss or damage had occured.”
Most business income coverage forms have a limit to this “extended” period. 30 days is often included in the policy, but a much longer period might be needed for your specific business.
Business income insurance is an often overlooked component of a well-crafted business insurance portfolio. The coverage can be complicated and settling loss of income claims can be tedious for the customer and the insurance company. Fortunately, at Southern Risk, our insurance agents have the knowledge and markets to provide you with a business insurance program that is comprehensive and affordable. Contact us today for a no-obligation review and proposal.