While most business owners are aware of the importance of insuring their buildings, personal property, and commercial vehicles, they often overlook a very important coverage – Business Income Coverage. For starters, it can be confusing to determine a coverage limit. And how does coinsurance work? What does the Period of Restoration mean? Here are a few talking points to discuss with your independent agent so you can be assured you’re purchasing the appropriate protection.
First, you should understand the purposes of Business Income coverage. This coverage protects your business from loss of income when there is damage to the premises due to a covered cause of loss that results in a slowdown or suspension of operations. But how does it work?
- By keeping the financial statements functioning as they would have if no loss had occurred
- By helping to retain key employees
- By helping to retain customers
In a nutshell, Business Income is defined as net income (net profit or loss before income taxes) that would have been earned plus continuing operating expenses incurred, including payroll. The coverage applies during the Period of Restoration which is defined as the period of time that usually begins 72 hours after direct physical loss or damage occurs. This ends on the date when the property at the described premises is repaired, rebuilt, or replaced with reasonable speed and similar quality or the date when business is resumed at a new permanent location.
Business Income Coverage typically also includes Extra Expense coverage. Extra Expenses are necessary expenses incurred during the period of restoration to avoid or minimize the suspension of business. Some examples would be increased rent, advertising costs, and temporary premises. It’s recommended that you always include Extra Expense as part of your Business Income Coverage.
Other considerations with this coverage include a no-limit actual loss sustained option which covers the actual loss incurred without a specific limit, and limiting the period of restoration to 3 or 6 months to lower the premium. A coinsurance provision could penalize the insured if the limit of insurance purchased is not equal to or greater than a specified percentage of the actual business income exposure, so many carriers offer an agreed amount (no coinsurance) option. Contingent Business Income Coverage may be an important coverage for manufacturers or suppliers to consider. This coverage applies when there is a loss to a dependent property such as your material supplier, or a loss at a manufacturing facility that supplies product to your distribution facility.
The importance of properly insuring your Business Income exposure cannot be overstated. It can literally keep your business afloat after a large loss. Talk to your trusted independent insurance agent to determine the appropriate coverage limit and conditions. It may be wise to include your accountant in that conversation as well!