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In today’s business environment, business owners purchase business insurance as if a claim for direct physical loss or damage is highly unlikely. The reality is that losses happen all of the time. Insurance can help if it's purchased as if a loss will absolutely happen in time.
Read on to learn how insurance known as business income insurance can help your business in the event of lost income or extra expense when property is damaged by a covered peril.
WHAT IS BUSINESS INCOME ?
Business income is an entity's net profit or loss, calculated as its revenue from all sources less the costs of doing business. Whether you are an international conglomerate or a small business, you are likely at risk should physical damage to your real or business personal property cause a loss of business income.
WHAT DOES BUSINESS INCOME INSURANCE COVER?
Loss of business income insurance, including "extra expense" protection, covers net lost income or profits that would have been earned, including additional or extra expenses, as a result of direct physical loss including civil authority (loss caused when a government entity denies access to a covered location). These business income coverage plans are included under a property policy to provide coverage for normal operating expenses, including payroll, and restoration costs. A business owner will benefit from these plans in the event of lost profits or business insurance interruption resulting from loss due to physical damage to covered property which requires restoration.
The calculator available here helps determine the business income and extra expense coverage limit to carry using a bottom-up approach starting with the net income of your business and adding continuing expenses to come up with the amount of coverage to be carried under the property policy.
Contingent business interruption coverage is a form of business income insurance that provides protection against lost earnings that are the result of a third-party supplier or distributor shutdown whose interruption directly impacts the insured's ability to produce a produce or provide a service. This coverage can also be extended to apply to some civil authority losses when a government entity denies access to the insured property.
IS BUSINESS INCOME INSURANCE REQUIRED?
Yes, businesses are often required to carry this insurance. In fact, most business contracts have insurance provisions that include specific business income requirements. Even a small business may find that the lender for a particular location, customer, or supplier has included a contract provision mandating business income coverage. Such requirements may also request coverage for civil authority related claims.
WHAT DOESN’T IT COVER?
Business income insurance can help tremendously but it doesn’t cover every need. Like all insurance policies, business income insurance coverage would have some exclusions. An example of some things that business income insurance would not cover are:
- Loss of income without property damage from a covered cause of loss to insured property at an insured location
- Financial failure of a business (unless it is due to an insured event)
- Loss of income that occurs due to a supplier (or major customer) going down unless covered by the insurance company
- Loss that occurs as a result of the economy
- Costs associated with product recall unless it is specifically covered
- Physical loss or physical damage to property
- Direct physical loss
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DOES BUSINESS INCOME HAVE A DEDUCTIBLE?
Deductibles in business income insurance are called "waiting periods" and are usually built into the policy form. They typically apply to business income coverage, and not to extra expenses.
Loss that occurs during the waiting period, typically the first 24 to 72 hours, is not covered by business income coverage. Some policies can be endorsed to remove the waiting period entirely.
WHAT'S THE DIFFERENCE BETWEEN BUSINESS INTERRUPTION AND BUSINESS INCOME?
Currently, the terms are basically interchangeable. Business interruption insurance was the term used in the mid-1800's for the earliest versions of insurance for financial losses stemming from physical damage to an insured's own property. As the coverage evolved and improved over the years, additional names were introduced. Today, most insurance companies have moved the title of this coverage from "Business Interruption" to "Business Income".
IMPORTANT COVERAGE TERMS
Knowing a few terms related to loss business insurance can help in purchasing appropriate coverage before a claim for damaged property occurs.
Actual Loss Sustained
With "actual loss sustained" coverage, business losses are not subject to a predefined limit. Instead, the insurance policy will cover the lost profits that your business will sustain during restoration of a damaged property location for a maximum of 12 months. Coinsurance typically does not apply. If the restoration period of the business may exceed 12 months, obtaining an alternate coverage form (perhaps to insure 18 or 24 months for example) is advisable.
Coinsurance is used to make sure that an adequate limit of insurance is carried for the business income exposure. A coinsurance penalty applies only if the limit insured is inadequate at the time of the loss. The penalty formula is "Limit carried/Limit Required x Loss". Coinsurance may not be suitable for smaller risks.
Not all policy forms are the same. Some insurance policy forms have a predefined limit, while others are essentially unlimited.
Some policy forms may impose cover limits over the time during which benefits will be paid, for example, 120 days or 12 months. Other insurance company policies impose limits of up to a month, with a maximum payable for each consecutive span of 30 days.
It is advisable to consult with your insurance professional before placing this coverage for your company.
When applying to the insurance company for coverage, include all operating expenses listed on the business' income statement or federal tax return. We recommend including all because it is difficult to determine which expenses will continue until the time of a loss. Some costs may not continue at the full amount while other expenses may continue but at a temporary location.
It's important to ensure the expense insurance will cover possible variances by including all additional business operating costs.
Extra Expense Coverage
Extra expense insurance will cover and help pay for all additional costs of in excess of the standard operational costs that your company will typically incur in the course of continuing its operations. This will help pay operational costs while the property is being repaired or replaced due to damage by a covered cause of loss. In most cases, extra expense coverage is included with business income coverage for your company.
This refers to the maximum amount available that the insurance company will pay under the policy. This limit is subject to policy provisions such as waiting periods and coinsurance.
It is advisable to seek professional business income insurance guidance to ensure that your company is adequately protected. Not all business income coverage is subject to a limit. With most insurance companies coverage applies to the loss incurred for not more than 12 months.
Net Income or Loss
This refers to the profit or lost income that the business incurs before taxes are calculated. The figure representing the loss of profits can usually be found on the business income statement. Lost income may also be found in the profit or loss statement or the federal tax return. When calculating the coverage for your company, always use the most recent 12-month figure.
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Business income typically covers payroll costs as a continuing expense unless ordinary payroll is limited or excluded under the policy. Ordinary payroll refers to the payroll for employees other than officers, executives, managers or contractual employees.
Insuring payroll helps prevent employees from leaving and avoids instances of employees not getting paid during the recovery period. Also, some labor agreements require payroll and benefits to continue.
Period of Indemnity
"Period of indemnity" refers to the maximum expected period of restoration or recovery that a business would go through in the event of total loss. This period of restoration after physical loss or damage is usually calculated in months. This length of time is always taken into consideration when determining the appropriate coverage limit for an interruption insurance plan.
In most cases, when operations resume after physical loss or damage, there is more time required for the business income to reach pre-loss levels. This is the case when significant property damage has occurred, which requires considerable resources to repair or replace. For this reason, an extended period of indemnity endorsement is often added to extend coverage to take the period of restoration of the property into consideration.
Waiting periods are usually built into business income forms and serve as a form of deductible. Waiting periods generally apply to business income coverage, and not to extra expenses.
Loss that occurs during this period, typically the first 24 to 72 hours, is not covered by the business income coverage. Some policy forms can be endorsed to remove the waiting period entirely.
How VANTREO can help with business income coverage
One of the most important things that we have learned from our extended history in providing property insurance services is that “apples for apples” quoting simply does not work. At VANTREO, we understand that business owners buy protection against loss, depending on their unique risk exposures as a business owner.
But we also know that circumstances change. As a business owner, the property insurance services that manage risk and provide coverage now will be different next year. In most cases, the property insurance you purchased last year will not provide adequate protection for losses this year or the next. This is why you need a property insurance policy strategy that provides coverage and protects your business as things change.
At VANTREO, we take pride in our services that enable businesses to take charge of their risk reduction and property insurance plan. We deploy a unique approach to insurance coverage that combines cutting-edge technology and proven human expertise in helping you decide on the most appropriate business interruption insurance for your needs. Consequently, our services give businesses the advantage of better protection and a better business interruption coverage plan that will actually increase the value of the business.
Find out more about how our insurance services approach can help protect your business operations, property, and provide important advocacy in the event of a loss. Let us know how to initiate a conversation with you!