Business Income Coverage: How It Works
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Income: It’s the reason we’re in business. Unless you’re an unprofitable startup…
Anyway, imagine you open shop and buy commercial general liability insurance to cover you against “slip and falls” and property insurance to cover you in the event of a fire.
Perhaps you are a small business owner and have purchased a business owner’s policy (BOP) and think you’re all set.
But have you considered business income insurance coverage?
What would happen if you suffered that fire and are out of business for two months while your property is repaired and your data is retrieved?
This is where “business income coverage” (BIC), otherwise known as “loss of income insurance,” comes into play.
Simply put, BIC is designed to cover any reduction on your company’s income when your day-to-day operations are interrupted by a covered cause of loss.
Even more to the point, business income insurance pays you the money you’d be losing out on while your business is brought back up to full speed.
How Are BIC Claim Payments Calculated?
Let’s break it down a little further in order to understand exactly what we’re getting here.
First, it’s important to recognize that BIC claim payments are calculated on net income and the continuing expenses that will mount up as you are going through the repair period.
Here’s a simplified example of business income insurance:
Your convenience store regularly posts revenue of $50,000 per month and only $20,000 in expense. This would result in a net profit of $30,000 per month.
$50,000 (revenue) – $20,000 (expenses) = $30,000 net profit per month
If the store suffered a fire resulting in a 1-month closure, you can expect your revenue to decrease to $0.00 and your expenses to be limited, say $10,000, as you will not be paying expenses that did not continue (heat, refrigeration, labor, etc.).
$0.00 (revenue) – $10,000 (expenses) = ($10,000) net loss per month
Your business income insurance coverage would cover the $30,000 (expected net profit) in addition to your ($10,000) expenses you incurred to reopen.
The BIC loss would be $40,000. That’s a lot of money to miss out on and would likely close the average small business, which is what makes this coverage so important.
$30,000 (expected net income) + $10,000 (expenses) = $40,000.
How Much BIC Coverage Can I Buy?
Typically, insurers will offer one of two options when it comes to how much coverage you can purchase to protect yourself against this particular risk…
Either a specific amount of coverage or coverage for the “actual loss sustained.”
Actual Loss Sustained: This loss settlement method would provide coverage for however much it cost to get back up to speed within the policies specified time frame (be sure to ask your agent what this time frame is when shopping for a policy)
Specified Amount: This loss settlement method may offer coverage in the amount of $25,000 based on the insurer’s previous claims experience. Any costs over that amount would come out of your own pocket.
Remember; insurers likely have a better idea of your “type” of company’s expenses in the event of a loss, as they have vast experience in paying insurance claims.
There may or may not be a time limit on how long of a period you can collect for covered damages.
Typically, the period covered is exactly how long it takes for your business to get back to normal operations.
Your insurer may also offer an option to purchase Extended Business Income, which may insure you for up to 30 days after your operations are back to normal.
Picture a Starbucks, which would need time for their customers to recognize they are back in business and begin to frequent their store again after all repairs are made and they are up and running.
What Are Continuing and Non-Continuing Expenses?
This is about as easy as it sounds. The continuing expenses are those that don’t go away while your business is not operating due to a loss.
Typically, these expenses, similar to non-continuing expenses, are dependent on how long you are out of operation.
If your income is interrupted due to a water leak in the office, which may be repaired within two weeks, you can expect to continue to have to pay your insurance premiums, keep all of your employees on the payroll, and leave your utilities active (heat, electric).
On the other hand, you may shut off the utilities and let some of your staff go if you are out of business for six months while having your building reconstructed after a tornado.
This example shows how a continuing expense may become a non-continuing expense depending on the duration of time your operations are halted.
Extra Expenses: Another Key Consideration
You may want to consider purchasing a business income insurance policy with “extra expense” coverage depending on what type of business you own.
Perhaps you suffer a loss that ceases your operations for a 6-month period; you may have to continue operations at another location.
Extra expense coverage would insure you against the financial losses you would incur as a result of moving operations to the new location and even the extra costs associated with paying staff to work additional hours to get your business back in the black.
Here are some specific examples of “extra expenses” you may incur as a result of your loss:
– The cost to rent a new facility and to transport your necessary equipment to that location (imagine a printing company that needs to move a several thousand pound printing press across town).
– The cost of overtime you would incur to have employees working around the clock to catch up on existing orders received prior to the loss.
– The cost to “sub” out any work you can longer complete in the event the machine that performs the specific task was destroyed in your loss.
As with any commercial insurance policy, it is recommended you speak with an independent insurance agent to discuss your organization’s potential risk for financial loss and the best way to insure again it.