Business income insurance pays for the loss of profits and the continuing expenses that an organization experiences after it suffers damage from a fire or other insured loss to its facilities.
After suffering a loss, with no revenue coming in, ongoing expenses can cripple your business, says Gloria D. Forbes, executive vice president with ECBM Insurance Brokers and Consultants.
“In many cases, it is the lack of, or inadequacy of, business income insurance that puts someone out of business after a fire or other interruption more than from any other cause,” says Forbes.
Smart Business spoke with Forbes about why companies need business income insurance and how to determine how much your company needs to survive a crisis.
What size and type of companies need business income insurance?
The size of a company is irrelevant. Regardless of your company size, an interruption in your business will result in the cessation of all revenue.
There are various ways to customize coverage and a number of forms available that can help you tailor your insurance to your organization’s specific needs. For example, if there were a fire at an engineering or law office, those facilities would need the insurance proceeds to resume operations immediately following the loss. These needs would include money for additional rental space, computers, equipment anything that would create a facility where people can get right back to work servicing their customers and generating revenue.
A manufacturing company with processes performed over multiple locations might need to spread a single insurance limit over all of those locations.
Often, organizations such as nonprofits mistakenly believe that they do not have an exposure because they don’t have a loss of profits after an interruption, but they do have continuing expenses and the inability to raise funds. There is a need of some sort for all organizations.
What are the factors to consider when purchasing business income insurance?
One of the most important factors to consider is the length of time you may be unable to conduct your business in the event that there is a major loss to the facility.
In addition to calculating the estimated expected profit, you must consider what expenses are likely to continue during the downtime. People often forget that there are many expenses, such as mortgages, loan payments, utilities and salaries that continue during the time that the business is not operating.
Another factor to consider is whether, when you open your doors again, your business will immediately return to the same level it was at prior to the loss. In some cases, it will take some time to regain customers once you are back in business.
How does business income insurance help in those instances when it takes some time for customers to return?
The standard coverage stops the moment the business is able to start producing again and opens its doors to the public. Unfortunately, especially in retail operations such as restaurants and clothing stores businesses that are dependent upon generating a stream of customers while the business was shut down, those people may have started to go to another organization to satisfy their needs.
So when your business opens its doors again, it may take time to get those people to come back to buying from you.
A business income policy or coverage can be extended to provide for that time period when you are back in business but not at the same level you were before the interruption.
Are there unique circumstances that can affect the amount of insurance you should purchase?
All too often, a business or organization will complete a worksheet to estimate what its annual loss is going to be and then underestimate other factors that leave it without the proper coverage.
There are several pitfalls people don’t consider when they answer the question, ‘How long will it take me to get back into operation?’ If they own their building, they often shortchange the amount of time it takes to reconstruct the premise. They forget about the planning stages and cleanup, and estimate that it would take six months to rebuild the building when, in actuality, it will take 10 months.
A second factor to consider is whether the business is seasonal. If there are wide fluctuations from season to season in the amount of revenue that is produced, a loss at the wrong time of year could result in having inadequate coverage in the event of a fire or other loss.
A third factor that could impact the restoration period is whether or not a company uses special equipment that would take a long time to replace. Often, people will focus on the length of time needed to replace the building but do not consider the length of time it might take to replace very specialized or customized equipment.
If your business process includes any kind of aging process in your production, a fire could result in a loss of revenue that continues for two or three years.
A professional risk management adviser will be able to identify the right type of coverage for you.
Gloria D. Forbes is executive vice president with ECBM Insurance Brokers and Consultants. Reach her at (610) 668-7100 or email@example.com.