The Loss of Business Income Tragedy
Suddenly, your business is destroyed and your income stream crashes to a halt. It will be months before you can hope to be operating again. Your property insurance will provide funds to rebuild, but where will your personal expenses, e.g., your home mortgage, come from? Will your valued employees drift off if there are no funds for payroll? Will your customers return when you reopen? What if your business can't stop and you must fund a temporary location?
Example. A dairy owner can't tell cows, "We're not going to milk for a month or so." A number of businesses must keep operating, such as newspapers and banks. There are, of course, other examples. Closed businesses can't maintain customers or fulfill important contracts.
Business Interruption Coverage—Protect Yourself Before It's Too Late
Many businesses know they need to cover their property with insurance to replace physical property. But most fail to see the significance of business stoppage. Fortunately, insurance is available to answer the need for income funds. Business Interruption, Business Income, Time Element, and Extra Expense are all terms used for insurable non-physical losses.
What Does Loss Of Business Income Insurance Mean For You?
Business income insurance covers business earnings in the event of an interruptive loss. The ISO forms state that:
Coverage is provided for net income (net profit or loss before income taxes) earned or incurred. Coverage is also provided to continue normal operating expenses incurred, including payroll
Think Profit and Loss statement.
* Tip. Use a worksheet to determine coverage.
A business income worksheet establishes coverage amounts of business interruption insurance. This establishes dollar amounts of coverage with no uncertainty. Involve your accountant in preparing a worksheet.
Do You Need Extra Expense Dollars?
There are two major reasons for extra expense insurance: competition (for instance, small businesses) and public demand (newspapers, banks).
Extra expense insurance is bought with business income insurance. It provides extra operating money while the business income coverage provides earnings. The extra expense funds cover continuing operating costs. This might mean temporary operating quarters until the permanent quarters are repaired or rebuilt.
Important Info: Additional Time Element
If you have suffered a business income loss or an extra expense problem, you are required to pursue normal operation quickly. This requirement protects the insurance company. That way recovery isn't prolonged because the business is enjoying an income stream.
What if business doesn't return to normal volume right away? After the disaster of being forced to close, nothing is more discouraging than opening the door to a slow start. There is special insurance for this situation. It's calledExtended Loss After Operations Resume.
Sometimes one business depends seriously on another business. Perhaps there's a fire at a computer chip factory and they can't supply the computer manufacturer. Or the anchor department store in a business's shopping center burns and shopping traffic disappears. Dependent Property coverage, formerly called Contingent Business Interruption Coverage, provides protection.
Many options exist in Business Interruption insurance. For example, the loss of rental from damaged property can be covered. So can the loss of tuition by organizations that receive their income at a given time of the year.
The specifics of business income coverage depend on the perils covered by the policy. The perils closely mirror those in the property policies we have looked at previously.
If you liked the idea of waiving coinsurance in a property policy, you'll like these four optional coverages that stop coinsurance from applying to a loss:
- Maximum Period of Indemnity
- Monthly Limit of Indemnity
- Business Income Agreed Value
- Extended Limit of Indemnity
* Tip. Every business should consider some form of loss of income insurance. Discuss this with your agent! It may be the most overlooked form of protection that you can't afford to ignore.