Intangible assets Featured

7:00pm EDT February 28, 2007

Many business owners wish they had a magic pause button they could push when they’ve suffered a loss and need to recover. But suppliers, lenders and employees often can’t wait. Business income insurance holds the key to helping business owners stay in business when their companies suffer a serious business-threatening loss.

“Business income insurance helps with the aftermath of an insured loss,” says Bill Reedy, instructional designer at Westfield Insurance. “It pays for lost income as a result of a covered loss and provides for the continuing expenses necessary to keep the company going until operations are restored. A related coverage, extra expense, provides for the miscellaneous expenses beyond normal day-to-day operations that are now necessary due to the loss.”

Smart Business spoke with Reedy about the purpose of business income insurance and how to choose a policy.

How does business income insurance differ from other types of coverage?

Most business owners are well aware of the need to carry fire and related property coverage on their building and business property. Similarly, most insurance agents, brokers or producers recognize this as the first step in securing tangible asset coverage.

Business income insurance, which goes a step beyond property coverage, is designed to make up for lost income and cover continuing normal operating expenses incurred (indirect loss) as a result of a fire or windstorm (direct loss). In so doing, business income coverage responds to the income statement and the expense (liability) side of the balance sheet of the business, while fire coverage protects the physical (asset) side of the balance sheet.

What features should companies look for in business income coverage?

The basic features in this type of insurance are largely standardized across the industry, so companies should focus on where they can receive the best customization for their specific needs.

For example, a retail store has different needs than a manufacturing plant. Consider a florist who has clearly defined inventory and sales peaks. The florist needs coverage with a business income limit that is sufficient to protect the business from the highest amount of expense and income loss that could occur during the period of time she needs to recover from a loss. On the other hand, if a manufacturer relies on other entities to supply raw materials to make his product, the manufacturer has ‘dependent property’ exposure. In this case, if a supplier has a direct loss, the manufacturer would suffer an indirect income loss. The manufacturer can purchase dependent property coverage to address this business income risk.

Because dependent property coverage is standard across most markets, the point of differentiation for a manufacturer is finding a trusted insurance adviser that recognizes when this coverage is needed.

How can companies determine the proper level of business income coverage?

An industry tool for determining coverage is a business income worksheet, but insurance carriers vary on if and when they have businesses complete this worksheet.

Insurance Service Office, the largest standard insurance advisory organization and forms author, only requires that a worksheet be completed when a business requests coverage on an agreed value basis. Agreed value is simply a limit that the policyholder, agent and company agree is adequate, based on these work-sheet calculations.

Problems arise when the agent or producer simply asks the business owner or accountant how much income they stand to lose in a fire, and uses this number as the limit for business income insurance. This approach does not take into account the expenses required (including payroll), nor does it allow for allowable deductions (such as non-insurable items) that work-sheets identify. The best approach for determining the appropriate level of coverage is to have the person in charge of overall finances for the business work in concert with a trusted insurance adviser to decide on the coverage and limit setting. Quality insurance advisers, such as independent agents, can strategically customize coverage through endorsements to work in the best interest of the business owners.

How can companies obtain business income insurance?

By seeking out professional insurance advisers who are familiar with business income coverage. A professional insurance adviser, such as an independent insurance agent, will not only be able to better advise on coverage, but also will be aware of a variety of markets available.

BILL REEDY, instructional designer, can be reached at (330) 887-2859 or In business for more than 158 years, Westfield Insurance provides commercial and personal insurance services to customers in 17 states. Represented by leading independent insurance agencies, the product we offer is peace of mind and our promise of protection is supported by a commitment to service excellence. For more information, visit