Having insurance helps to ease the pain after an accident or disaster—having the right coverage helps so much more. Consider this, if a fire were to destroy your manufacturing facility or office complex—your property insurance would cover the loss of your building or any damage to your personal property. But what about the loss of your net income and the expenses that you continue to incur while your business operations are suspended?
Business income insurance (also known as business interruption insurance) covers the loss of income that a business suffers after a disaster. It helps preserve the future of your business by replacing your income stream and providing needed funds to meet your payroll and other ongoing necessary expenses while you rebuild and repair your property and restore your business to the condition that would have existed had there been no fire/loss.
Business interruption insurance differs from property insurance in that a property insurance policy only covers the physical damage to the business. In contrast, the business interruption policy covers the profits that would have been earned.
You can add this coverage to your business’s current property insurance policy, your package policy (such as a business owner’s policy), or as part of a standalone policy. Since business interruption is included as part of the business’s primary policy, it only pays out if the cause of the loss is covered by the overarching policy or a defined event in the case of a standalone policy.
Extra Expense Insurance
In the aftermath of a disaster, you may need additional help with expenses above and beyond operating expenses to keep business moving forward—that’s why we offer Extra Expense Insurance. Extra expenses may be the money you need to fund your disaster recovery and business continuation plans or one of the following:
- renting and insuring alternate locations
- installing new communications equipment at those locations
- paying employees bonuses to work extra hours or even to stay working during a temporary shutdown
- purchasing additional equipment so employees can work from home
- advertising that you are still in business
- using subcontractors to produce your goods and services while you recover
These are just some examples of extra expenses you might incur during the time your business is trying to stay in the marketplace after a loss.
Determining extra expense limits before a loss
Calculating how much coverage you may need can be difficult. While business interruption values are determined using your financial statements, extra expense amounts are determined by looking at your monthly budgets. Extra expense amounts are those expenses over and above your normal operating expenses which you incur while you work to continue operations after a property loss and to reduce your business income loss.
Keep in mind that while using extra expense dollars, you are also staying in business and protecting your market share. If your company has a Business Continuity plan, extra expense dollars are used to fund this plan.
Difference between a deductible and a waiting period
A deductible is a dollar amount that is subtracted from the amount of an adjusted loss. For example, lets say a fire causes damage to one of your buildings—as a result, you suffer a $2,000,000 loss of business income. The insurance company agrees to pay $2,000,000 under their policy less a $10,000 deductible—meaning you receive a payment of $1,990,000.
A waiting period is a period of time, normally clock hours, that must elapse before the insurance company starts calculating a business income loss. So, if the waiting period is 24 hours, the company will not consider any business income loss that was incurred in the first 24 hours after the loss.
Contingent business income exposure
Every company has suppliers and customers. Damage to either will have negative effects on your business. Contingent business income insurance indemnifies you for upstream (supply) and downstream (customer) loss that affects profitability.
Suppose your company makes dress shirts—several vendors provide integral parts such as fabric, buttons, etc. Your button supplier suffers a fire and cannot produce buttons for your shirts, compromising your ability to complete assembly of your shirts and delivery to market. Unless you have an alternate supplier that can meet your supply schedule immediately, you will probably suffer a contingent business income loss because of this.
Some companies give an automatic limit for contingent business income, but automatic limits may not be enough. If you have critical customers and suppliers, or you depend on contract manufacturers or leader type property to draw customers to your business, it would be a good idea to evaluate your contingent business interruption limits needs the same way you have developed your limits for business income insurance for your own premises.