The Importance of Business Income and Business Interruption Coverage: Safeguarding Your Business

When disaster strikes, many business owners worry about immediate damage to property or physical assets, but what about the income lost during the time it takes to rebuild or repair? Business income insurance, often referred to as business interruption insurance, is essential for companies that want to safeguard against this financial strain. Here’s an in-depth look at why business income coverage is critical, how extra expense coverage comes into play, and what’s involved in setting it up for your business.

Why Businesses Need Business Income / Business Interruption Coverage

Business income coverage protects against the loss of income a company would have earned under normal operating conditions. It’s not just about damage to physical assets; it’s about keeping the business financially afloat when unexpected events, like fires, natural disasters, or other covered incidents, force operations to pause. This coverage can mean the difference between a company bouncing back stronger than ever or facing financial ruin. In a world where even a few days of inactivity can mean a significant revenue loss, business income insurance provides the necessary cushion to ensure continuity.

What Is Extra Expense Coverage?

Extra expense coverage is designed to help companies avoid prolonged shutdowns by covering additional costs that may arise from taking alternative steps to stay operational. It covers costs that wouldn’t have been incurred if the business interruption hadn’t happened. Unlike business income coverage, which compensates for lost income, extra expense coverage pays for the extra measures businesses may need to take to maintain their operations or minimize the time of interruption.

Types of Extra Expense Items

The expenses covered under extra expense coverage are usually those necessary to keep the business running despite the interruption. These can include:

• Temporary relocation costs: Rent or lease for temporary spaces if the primary location is unusable.
• Rental equipment costs: Machinery, furniture, or technology required to set up a temporary workspace.
• Overtime wages for staff: If employees need to work longer hours or even on off-days to keep operations going.
• Shipping or logistics adjustments: Additional costs to transport goods to clients from a temporary location.

Understanding the Deductible: The Waiting Period or Time Deductible

One unique aspect of business income insurance is its deductible, which is typically in the form of a waiting period rather than a financial amount. Known as a “time deductible,” this waiting period dictates the number of hours or days that must pass before coverage kicks in. This time deductible helps keep premiums affordable by eliminating minor claims and ensuring coverage is focused on significant disruptions.

What Type of Losses Are Covered by Business Income Insurance?

Business income insurance covers financial losses from a variety of incidents that cause a business interruption. Typical covered losses include:

• Damage due to fire, wind, hail, or other specified perils that prevent the business from operating
• Losses related to civil authority closures if a business’s area becomes inaccessible due to governmental restrictions following a covered peril
• Situations where restoration or rebuilding may take time, leading to temporary revenue losses

However, it’s crucial to understand that business income insurance won’t cover every interruption. For example, if the interruption is due to a supply chain delay that doesn’t directly damage property, that type of loss generally isn’t covered. Each policy can have exclusions, so it’s wise to discuss these thoroughly with your insurance advisor.

What Information Is Needed to Add Business Income Coverage?

Adding business income coverage requires providing certain financial and operational details to help set an appropriate coverage amount. Some typical information needed includes:

• Past income statements to establish historical earnings
• Fixed operating expenses
• Payroll costs to ensure employee retention during an interruption
• Information on your industry, typical recovery times, and specific risks your business might face

How to Determine the Suitable Coverage Amount

To determine an accurate coverage amount, work closely with your insurance professional to assess your business’s typical revenue, expenses, and risk factors. Some considerations include:

• Your highest earning months and average monthly income
• The time needed to resume full operations if interrupted
• Fixed expenses and payroll commitments during a potential shutdown
• Extra expenses you might incur to reduce the interruption period

A comprehensive review with your insurance provider will ensure you secure a policy amount that can handle both income replacement and extra expenses without over- or under-insuring.

What to Expect in the Event of a Loss

If an interruption does occur, your business income insurance policy will work to cover lost income based on the terms of the policy and the waiting period. Claims typically involve submitting documentation of your income prior to the incident, as well as detailed records of expenses during the interruption. During the process, expect regular communications with your adjuster and possibly inspections to validate the impact on your operations. Your policy might also include assistance with cash flow planning while the claim is in process.

How to Track Business Income and Extra Expenses

To simplify claims and help insurers better assess the loss, it’s essential to keep meticulous records of income and expenses:

• Maintain monthly income and expense statements to track changes in revenue
• Log all temporary operational costs during a loss event, even minor adjustments
• Set up a system to monitor overtime, equipment rentals, and other “extra” expenses that could fall under your coverage

Accurate tracking will streamline the claims process and ensure you receive the coverage benefits your policy promises.