Business income and extra expense coverage is often overlooked and widely misunderstood. It is not designed to provide for lost income due to poor business management, market conditions, competition or other business risks. Rather, it is designed to cover the reduction in net income that results from the suspension of operations due to a physical loss at the insured premises.
Many situations can cause or contribute to a business interruption loss. Identifying the contributing factors and evaluating the potential financial impact on your business will aid in determining your need for business interruption coverage.
- Property damage at insured’s location Consider what might happen when direct physical damage to property prevents your organization from operating or reduces operating capacity. Risk-control measures taken to reduce the possibility of direct physical loss can help reduce a business income loss.
- Property damage at other location Consider what might happen if your organization’s own property gets damaged while off the insured premises, or there is damage to a business that your organization depends on. Think creatively about the effects damage to another’s property might have on your organization.
Determining adequate insurance limits
Periodically taking stock of your business interruption needs and comparing them to your current coverage will help confirm that your business is properly protected in the event of a loss. There are tools such as business income and extra expense worksheets available to help determine the amount of protection needed by your business.
When determining an adequate insurance limit, consider the following points.
- The amount of time it will take, following the worst possible loss to your property, to restore your business to where it would have been had no loss occurred
- The amount of money needed to achieve your normal net profits and to pay both normal, day-to-day expenses and extraordinary expenses required to restore your operations quickly
- Which normal expenses will continue and which will not in the event of a shutdown for a particular amount of time
Considerations beyond the worksheet There are other factors that will play into the amount of coverage that you need.
- Work force. In the past, manufacturers chose not to insure their direct labor costs, as unskilled labor was easily replaced. That’s not true in today’s market. You may want to consider insuring ordinary payroll.
- Loss of a supplier or major customer. Some businesses depend on each other so much that they should consider coverage for that interdependency. Contingent business interruption protects you when your supplier or customer incurs a loss that has a financial impact on your operation.
- Lost customers. You are back in business but your business isn’t back. Your customers are now relying on your competitors. Extended periods in indemnity clauses give you an opportunity to bring your customer back and restore your business to the pre-loss level.
Not just for manufacturers Service organizations often think they don’t have to worry about downtime, but transitions are more expensive than one might think. Increased rent, employee overtime and moving costs are examples of extra expenses that service organizations should consider insuring.
Time spent reviewing your business interruption needs and discussing these issues with your insurance agent will ensure you are suitably covered in the event of a loss.
Carmine DiLonardo, one of the 27 employee-owners of SKS, the Midwest’s leading independent insurance agency, has nearly 12 years of experience in business insurance and brings a unique perspective. Reach him at (513) 977-3139.