Business income coverage Featured

8:00pm EDT July 26, 2008

When a major fire strikes a business, it is very traumatic, but it does not have to be completely debilitating.

The recovery often depends on fore-thought and planning, says Christine Jones, CIC, a commercial insurance broker with Westland Insurance Brokers.

The need to insure the business’s financial stream is crucial in protecting it from unexpected disasters. Business income coverage is a form of property coverage designed to pay the loss of income and continuing expenses that allows a business to recover following a total or partial shutdown of operations, Jones says. Its purpose is to replicate the income stream and cover expenses as if no loss had occurred, replacing income, ongoing expenses and payroll while the business is out of commission.

Smart Business spoke with Jones about business income coverage, how to determine the appropriate limit and how this coverage can potentially save your business.

How do business owners determine what type of coverage they need?

There are two ways business income coverage is typically written.

The first is actual loss sustained. This often provides the best form of coverage for a business. There is usually no limit to the amount reimbursed with this type of coverage within the 12-month policy period. A company simply must prove it would have made that amount of money.

If actual loss sustained is not available, the insured will have to determine a limit that is appropriate to his or her business. This amount is determined by providing the insurance agent with income history and statements and completing a detailed worksheet to calculate future income projections of the business.

How does a business owner determine the correct limit of coverage?

Determining limits can be more cumbersome with business income and extra expense coverage. It is not the same as determining coverage for property or a physical asset. There is not a tangible value for future income. Therefore, worksheets and projections must be worked out carefully to determine the most accurate income amount possible and the correct limit required.

To determine the correct limit, we start by asking some questions:

How long will it take to reopen?

Keep in mind fire investigation, debris removal, etc. Will you rebuild at the current site or move to a new location? Would the new facility require architectural changes? What is the estimated time needed to draw up new plans? How long will it take to obtain proper building permits? How often does the board meet if you need planning and zoning approval to rebuild? It is important to factor in potential delays. Finally, there is the time necessary for the building process itself.

What are other cost issues?

Are you planning to keep all employees or just key employees? If you let your employees go, new ones will have to be hired and trained before reopening for business. Plus, you may lose talented emloyee to a competitor. You must also keep in mind the time required to replenish stock and replace machinery, equipment and furnishings.

What happens if a business loses customers in the period that it is down?

Extended period of indemnity coverage helps with that, as well. After the business reopens, the income stream may continue to be disrupted if customers have moved to a competitor. Some may even not return. Coverage typically only lasts until premises are restored within the 12-month period or the limit of insurance is exhausted, whichever comes first. However, most carriers will provide an extended period of indemnity, which kicks in after a business reopens. Often, there is a gap when a business reopens between what a business was earning before the loss and what it is earning after it reopens. This will help owners recover. Extended periods of indemnity are typically 30 to 120 days and will cover any loss of income for that period but will cease after that period whether you are fully up and running or not.

Are there other types of coverage business owners should utilize to help their business reopen after a loss?

Extra expense coverage is also beneficial. This coverage includes those extra expenses mentioned earlier. It is used to avoid or minimize the shutdown of a business. This may mean moving down the street to lease a facility close to your original location. This coverage would pay for that new lease and to move any supplies that were salvageable. It is also designed to minimize suspension of operations if the business cannot continue to operate. The quicker you can get back in business, the less likely customers are to leave for the competitor.

Extra expense coverage is critical for any company whose customers depend on it on a daily basis. For example, an insurance agency will have clients with claims every day. It is crucial to find any means necessary to get up and running so customers do not leave and are provided the customer service they expect.

CHRISTINE JONES, CIC, is a commercial insurance broker with Westland Insurance Brokers. Reach her at (619) 641-3213 or at