What is business income coverage?
Is business income insurance the same as business interruption insurance?
How does business income coverage work?
These are three questions I’m going to answer, coming right up
Okay, business income, business interruption, loss of rent, and other names are similar coverages that are made part of a commercial property policy or business owner’s policy.
The intent of business income coverage is to replace the lost income a business sustains when it is forced out of business due to a covered claim.
Here’s an example, a local bakery suffers a kitchen fire that substantially damages their premises.
They can’t operate fully or even partially until the fire and smoke damage is repaired, new equipment is purchased and installed, and fixtures are replaced.
The estimated time to get all that work done is 5 months.
How will the business owner survive?
And pay key employees in order to retain them during this downtime, pay other bills, like rent, power, insurance, and benefits, and pay themselves while there’s no income coming in?
This is where business income coverage steps in to pay for those continuing ongoing expenses and lost profits.
In most business owners’ or BOP policies, you have 12 months of coverage for what you actually sustain as a loss.
Meaning the insurer will pay all ongoing costs and lost profits for up to 12 months while you’re fully or partially out of business.
What doesn’t the insurance company pay for?
Things like costs that shouldn’t continue – in the case of the bakery things like flour, butter, and sugar – these costs aren’t going to continue if you’re not operating.
Now, in larger firms that aren’t insured on a BOP-type policy that gives the 12-month actual loss sustained coverage, things get a bit more complex.
In these larger firms, the insured needs to make a determination of:
The limit of coverage they want,
The maximum duration of how long they will be out of business,
If they want to include or exclude something called ordinary payroll which is all non-managerial payroll, etc.
This makes business income coverage a bit more complex, but in a larger firm there’s more at risk so getting this right is critically important.
How do you do that?
You work with a skilled broker to complete a business income worksheet.
It’s basically a worksheet that will calculate the ongoing costs you want to be reimbursed for, the lost profits, and something called extra expenses.
Extra expenses are those costs the business will incur to expedite getting back into business faster.
Need equipment expedited and have to pay the manufacturer a premium to get it in one month rather than three, this is what extra expense coverage will pay for, plus a whole lot of other costs incurred to get you back in business faster.
Here’s the bottom line.
For small businesses, the complexity of business income is solved by providing automatic 12-month coverage for the actual losses you sustain in a loss.
Just keep in mind that the clock starts ticking from day one post-loss, so moving quickly to get back in business is important.
For larger firms, there is a complexity that needs to be handled.
What limits you select, the duration of coverage, and what you want to include, and exclude all can be figured out on the business income worksheet.
Haven’t done a worksheet on a renewal?
This is a problem and indicates that you likely don’t have the right limit of coverage.
You could be way underinsured and subject to serious claim problems if a loss occurs – or you’re overpaying for too much limit.
Need help figuring it out?
Why not contact me and let’s have a conversation about how you resolve this issue?
I promise, no hard-core selling or pressure in this conversation.
Just some time to talk about the issues you facing and see if we might be a good fit for your needs.
If you’d like a copy of that worksheet to try and figure it out on your own, let me know and I’ll send you an excel version of it – no problem.