Business Income Coverage: the most critical insurance coverage money can buy
- Bragan Jackson
- Dec 3, 2022
- 5 min read
Updated: Dec 4, 2022
The Risk Sentinel - VOL 1, ISS 1
Between 25% and 60% of businesses that experience a catastrophic loss never recover. Let that sink in. 25-60 percent. That is an astronomical number. How could it possibly be so high given there's a perfectly capable solution which ensures it doesn't happen to your business? The answer is simple: most businesses do not accurately assess exactly how much coverage (or maybe even what kind?) they actually need.
Most people and businesses are able to assess the basics - that is, they have a general idea of how much "stuff" they have. There's lots of misconceptions about that topic, but we'll save those for another day. What almost no one thinks about, however, is the time it might take to get their "stuff" replaced. When you miss that crucial detail, you might find yourself in a position where getting your tangible goods replaced is no longer relevant.
Say, for example, you run a machine shop. Most of the raw materials you need to run your business are readily available from multiple suppliers so there's not a whole lot of exposure to losses if all of your stock is damaged or totally destroyed. What about that CNC machine over in the corner though? With the supply chain shortage, speaking specifically to chips and computer systems that make expensive equipment like a CNC machine run properly, there can be massive delays in getting a replacement machine up and running. Miss-calculate how long that replacement machine could take to get your business back on its feet might and it might mean you run out of money to keep the lights waiting.
In the following we'll give a brief summary of the insurance coverage you can rely on to get you back on your feet following a catastrophic loss, as well as some often missed enhancements that might mean the difference between a manageable recovery and one where you have to fight tooth and nail to make ends meet.
The Heavy Hitter - Business Income Coverage (aka Business Interruption Insurance)
This is the primary coverage you or your business need to get right. Business Interruption coverage can reimburse you for post loss expenses like:
Lost net income (based on financial records)
On-going expenses like
Mortgage, rent and lease payments
Loan payments
Taxes
Employee payroll
For a lot of businesses, the availability of the Businessowner's Policy (or BOP), make insuring Business Income exposure a little more simple. Oftentimes, a BOP will be written in such a way that whatever the business' income loss is, it's covered on an ACTUAL LOSS SUSTAINED [ALS] basis for up to 12 months.
This is a great concept, but it doesn't mean you're out of the woods just because you have a BOP protecting your business. Some carriers attach dollar limits to the business income coverage - these limits often have nothing to do with your business or how much coverage you actually NEED. Rather, they attach them to protect against catastrophic losses in areas prone to hurricanes and wildfires (for example). What about our hypothetical example above? If that chip for the CNC machine leads to a 14 month delay on the replacement, even your business owner's policy could leave you scrambling to stay afloat for two months.
For the sake of argument, let's say your business isn't eligible for a business owner's policy (there's a multitude of reasons this might be the case), now what? You and your insurance agent are going to be left with the task of calculating a dollar limit of your own. This problem is made even worse for businesses that were once eligible for a BOP, but are now having to seek coverage from a new carrier that doesn't offer a BOP for your business. A coverage that was once "included" in your premium calculation now carries a specific and easily quantifiable cost. The temptation now, is to just purchase a little less. What's the worst that could happen?
The Silent Partner - Extra Expense Coverage
If tangible property coverage is the foundation of your policy, business income coverage would have to be the roof. That leaves Extra Expense coverage as your walls, windows and doors. Extra Expense Coverage can provide reimbursement for expenses like:
Renting a temporary place of business while the original place of business is being restored
Replacement of hardware, technology and furniture
Paying overtime for employees or hiring more employees
Leasing equipment
Once again, the un-endorsed business owner's policy provide a simple solution to the Extra Expense issue. Extra Expense is covered immediately after the direct damage occurs (and assuming there is a business income loss), and continues to do so for up to 12 calendar months. For those businesses getting coverage from a policy other than a BOP, it's possible to purchase a single limit for Business Income and Extra Expense combined (almost always recommended when possible), but the timing of payments becomes a factor you need to be aware of when using this method.
In coastal locations it's not uncommon for insurance carriers to split the business income and extra expense limits up. Knowing the split exists, what the limits are, and how that affects your business is crucial to your risk management plan.
The Robin to Batman - Utility Services Coverage
What happens when a loss is caused by damage from a covered peril to property away from the insured’s premises? What if this is the only loss you suffer?
Recently, Hurricane Ian devastated the western coast of Florida. Homes and businesses alike have been decimated. Undoubtedly, however, there are some buildings that made it through [miraculously] unscathed. Are they able to operate business as usual? Unlikely. Following an event of that scale, the infrastructure itself has been compromised and it could be weeks before the power is turned back on in some jurisdictions.
Utility Services - Direct Damage says the insurance company:
will pay for loss of or damage to Covered Property described in the Schedule, cased by an interruption in utility service to the described premises. The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss [...] located off the described premises.
Keeping on theme, Utility Services - Time Element provides:
Your coverage for Business Income and/or Extra Expense [...] is extended to apply to a "suspension" of "operations" at the described premises caused by an interruption in utility service to that premises. The interruption in utility service must result from direct physical loss or damage by a Covered Cause of Loss [...] located outside of a covered building described in the Declarations.
Both of these endorsements are likely non-negotiable(s) when it comes to purchasing an insurance policy to protect your business. Cat Ferris, the commercial lines academic director with the National Alliance says:
While certain industries are at a greater risk of shutting down than others, most business owners take for granted the importance of municipal utilities in their daily operations.
Don't let your business wind up being the one that misses this crucial coverage enhancement.
Where the rubber meets the road
For the sake of brevity, we'll wrap it up here. Note, however, there are several other enhancements and options that we'll cover in a future post. The bottom line is you need to be extremely cautious about what kind of business income coverage you buy. Avoid the temptation to skimp on this category of coverage/expense - your business' livelihood (and possibly your own) hang in the balance.
If the task of assessing you business income loss exposure seems daunting, you may want to reach out to Independent Risk Consultants for a consultation. We're well versed in businesses of all types and would be more than happy to help you tackle the challenge of getting you set up for success following a loss or disaster that affects your business.
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