Consider a fire that destroys your manufacturing facility or office complex. Your property insurance would respond to the loss of your building or 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) is a type of insurance that 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 ordinary payroll and other necessary continuing 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, while the additional coverage allotted by the business interruption policy covers the profits that would have been earned.
This type of coverage can be added onto the business’ property insurance policy, 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’ 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
Extra Expense Insurance provides a good resource to help you continue your business activities while recovering from a property loss by paying necessary expenses, over and above your normal operating expenses that you incur to continue operations. These extra expenses are usually intended to reduce the business income loss you would otherwise incur. This may be the money you need to fund your disaster recovery and business continuation plans. Extra expenses can include 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 extra 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
This is one of the most difficult amounts to determine. While business interruption values are determined using your financial statements, extra expense amounts are determined by your monthly budgets. Extra expense amounts are those expenses over and above your normal operating expenses incurred to attempt to continue some or all of your operations while recovering from 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. Ex: A fire causes damage to a building. As a result, an insured suffers 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. The insured receives 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. Example: 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 your company 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.