Business interruption insurance & extra expense (or “loss of business income”) coverage, though often an afterthought, is a critical component of a commercial property insurance policy. Coverage is broken into two main categories; business interruption–continuing/ongoing expenses, payroll, loss of net income (profit), and; extra expense–additional costs incurred by you to minimize the severity and/or duration of the interruption of your business operations. These so-called “extra expense” items might include boarding up windows, emergency advertisements or notifications to your customers, or rental of a generator.
Standard business interruption & extra expense (BI/EE) coverage is triggered by a covered physical loss at the described premises. In other words, the loss of business income must be caused by a covered property claim at your business–like a fire. Optional coverage enhancements are generally available that can extend business interruption coverage for you resulting from covered physical losses at off-site locations including; dependent properties (like the factory of your main supplier); leader locations (the shopping mall on the corner that drives your walk-in business) , and; utility services (the utility companies that supply our business with light, heat, water & internet). Be aware that these optional enhancements may be subject to additional policy terms & conditions, and are likely to be written with separate (lower) coverage limits.
While most property coverage is written with a deductible expressed in a dollar amount, BI/EE coverage is normally written with a waiting period (deductible) measured in hours… 72 hours is typical, but wind-prone locations may be subject to a longer waiting period (if coverage is available at all).
Each business has a unique mix of expenses and incomes. As such, there’s no one-size-fits-all approach available to aid in selecting a coverage limit (the amount covered). The function of BI/EE insurance (and more generally, all insurance) is to indemnify the policyholder following a loss. In the case of BI/EE coverage the policy aims to financially do for you what the business would have done… had the loss not occurred. Careful estimates of future sales and expenses must be made to ensure that an adequate level of coverage is carried.
There are a variety of BI/EE coverage worksheets that your insurance agent may complete when providing a quotation for coverage. Prior to requesting a quotation, you should gather financial statements for the business including a recent “profit & loss” report. Smaller businesses without formal financial statements can make a rough estimate of the needed coverage limit in one of two ways: by subtracting the annual cost of expenses that won’t continue (following a business interruption) from total annual sales (fig. 1), or; by adding annual profit to total payroll and expenses that continue to occur whether or not the business is open (fig. 2). Both methods estimate your annual coverage need. Some businesses can rebuild and recover in less than twelve months, while others will take longer. Be sure to factor the anticipated recovery time in your calculations.
The settlement of a BI/ EE loss can be a complicated business. Your claims adjuster (often an accountant) will need to review detailed financial records for your business including bank and financial statements; purchase and inventory records; and for service-businesses, appointment books. By comparing prior and current time periods and other trends in your financial records, the claims adjuster will work with you to determine a fair assessment of the actual amount of your loss.
From determining a business interruption coverage amount through claims settlement, detailed (and accurate) financial records are critically important. When it comes to property insurance, it is especially important that duplicate records are kept off-site in case the originals are destroyed in a loss. Remember that uninsured property losses (like flood or earthquake) aren’t covered under business interruption either.
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