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.