Business income (interruption) insurance is a survival strategy. Many business owners are comfortable that their insurance policies provide adequate protection for their business should a loss occur…that comfort may be artificial because those policies haven’t been tested. The surprise comes when the claim happens.
Some frightening statistics:
- over 40 of businesses that suffer a serious loss never re-open
- 4 out of 5 business income losses in the US are underinsured by nearly 50%
Business income insurance provides the critical funds necessary to get you back into business after a serious claim occurs. Let’s look at the components of this vital protection. When a loss occurs, you will be reimbursed for your profit, continuing expenses, “ordinary” payroll and unforeseen expenses from the date of the loss until the business is “prudently” restored. But how do you determine that period of restoration? How long will it take to rebuild? How long for blueprints to be drawn up and certificates of occupancy to be approved? Are there new building ordinances that require compliance that will delay the restoration process?
Calculating a value for a business income loss is a dynamic process that requires time and the assistance of an insurance professional. That value, or coverage limit, likely changes every year, sometimes significantly, which means the calculation needs to be done annually. Not doing so subjects a business to the statistics cited above.
Fortunately, creating a “survival” or “business continuity” plan doesn’t have to be complicated. A business income worksheet, and good questions from your broker, takes care of the bulk of the task. The questions should deal with the duration of a potential shutdown, employees that need to be retained, unique equipment that needs to be replaced, peak periods in sales or production, consequences of severe weather and whether any temporary locations might be available. The answers to these questions are unique to every business and require careful consideration.
Once the business income policy limit is established, it is important to deal with any coinsurance clause that may be on the policy. Simply stated, a coinsurance clause is a penalty clause and should be eliminated, where possible. Short of that, the business income policy limit must be compliant with the coinsurance clause so that the business does not become unnecessarily responsible for paying some percentage of the claim.
Another important consideration in determining the exposure to a serious business income claim is whether there is a single customer, or supplier, that is critical to the operation of the business.Contingent business income insurance is available to insure that customer, or supplier, in the same manner as insuring the business itself.
Business income insurance does not have to be complicated, but it does need to be right. It just might be a matter of survival.