Business Income Insurance - Often Misunderstood; Things to Think About

By R. Scott Wolf

Business Income Insurance is probably one of the least understood components of an insurance program, yet it is probably one of the most important. It is akin to what disability insurance does for us personally should we become injured and unable to work – it protects our income stream and our ability to pay bills.

The same applies to a business if it becomes injured in a way that interrupts its operations which will ultimately affect cash flow i.e. stream of income. To be clear, business income insurance is designed to replace income that would otherwise have been earned by the business had no loss occurred. Unfortunately, it has been found that businesses are not typically insured properly in this regard. Some businesses may be under insured, over-insured, have detrimental exclusionary language contained in the policy or they might not have the necessary endorsements in their policy that actually expand coverage to address specific exposures. A shortfall in coverage can have a disastrous effect on the future viability of the business.

Business Income is generally defined as net profit or loss before taxes, plus continuing normal operating expenses, including payroll. Coverage is usually limited to the loss of income sustained until the property is restored, or for twelve months following the physical loss or damage. Some questions to ask here would be what would happen if it takes longer than twelve months to repair the premises? What is meant by the term “restored”? Does that mean my business is fully operational just as it was prior to the loss? Coverage however must be triggered by a covered peril described in the business income coverage section. If the event was not as a result of a covered peril then there is no coverage. What is a covered peril? Are my exposures covered under my current policy?

Whether your business is a manufacturing, distribution, construction, ecommerce, public entity, not-for-profit or whatever your operation you have this exposure and it should be addressed with attention to detail. Outlined below are some areas to investigate to help you better protect your business with regard to a potential loss of income:

• Conduct a thorough review of your operations and exposure to risk. This is the staring point to get you to ultimately understand how to better protect your business. If you do not know what your exposures are how can you expect to protect against loss? Draw maps and diagrams of your supply lines and income streams. Recognize and understand where a potential interruption could affect your business.
  
• Once you discover what your exposures are then seek to equate them with financial loss. For example if your building were to burn to the ground tomorrow how would that affect your business what would that do to cash flow? How long would it take to rebuild and get operations (cash flow) to where they were prior to the loss? What if your main supplier suffered a loss that now cut off your supplies to complete your process? Would you still be able to operate? For how long? Are there other suppliers that you could tap into for the short term? It is at this point where you complete a business income worksheet. The worksheet contains questions addressing your company’s income, continuing expenses and projections of how long you may you might be out of business should a loss occur. Some of these you will find to be thought provoking when completing the worksheet. Some of the answers may be guesses but they should be educated guesses. Do some research. Now is the time to investigate, prior to a loss.
   
• After you have assessed your exposures and completed the business income worksheet it is now time to determine what the appropriate coverage design will be to properly cover your business. This is where it can become extremely complicated. There are a variety of coverage forms, business income with extra expense; business income without extra expense; extra expense coverage form; and leasehold interest coverage form. Which form is right for you? There are the causes of loss forms to consider, basic, broad and special. Again which one is right for you? However there should be no real good reason why you would not have the special form (this is the broadest). Then there are the endorsements to consider. There are endorsements that exclude coverage and there are endorsements that expand coverage. For example, does the policy you purchased contain exclusionary language with regard to “idle periods”, “loss of contracts”, “consequential losses”, “utility interruption” and “finished stock” just to name a few. All of which could affect your recovery. Some of the endorsements that expand coverage are “expanded limits on loss payment”, “business income from dependent properties – broad form”, “utility services”, “increased period of restoration” and there are many more. Which ones do you need and which one don’t you want to have contained in your policy? Again, this takes analysis and foresight.
  
• At the same time you are considering the issues above you should be thinking about back up and contingency plans in the event of a loss and how to mitigate loss? How do you get your business back in operation? Who do you call first, second and so on? Do you have a process to get your business back up and running should you experience a disaster? Are there other firms you can partner with to assist you in the process and keep your business productive? The answers to these questions are vital to a successful outcome should you experience a business income loss.

As you may have gathered this can be a very detailed and complex topic. There are many points to ponder and a variety of scenarios to consider. One could spend days on addressing one portion of coverage for a larger organization. The bottom line is to recognize that there are many questions that should be asked in order to come up with the appropriate solution to your business income insurance needs. Take the time to address it – someday it may serve to save your business!

R. Scott Wolff, CIC, CRIS, is a Premier Risk Management, LLC partner. He has over 25 years of experience in the insurance industry and possesses an extremely wide range of insurance and risk management knowledge. He is well versed in property and casualty coverage along with directors and officers, errors and omissions, intellectual property, new media and Internet related coverage. He has been recognized by the Professional Insurance Agents Association and received an award for Outstanding Achievement. He attended Vale Technical School, for claim and loss technical training; the IRM School for Fire Safety and Protection; the Royal Insurance Underwriting School, Sitkins Producer Training, Miller-Heiman Strategic/Conceptual Selling and the National Council for Insurance Marketing.