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In today’s business environment, business owners purchase insurance as if a claim for physical loss or damage is highly unlikely. The reality is that losses happen constantly, including fire, flood or earthquake damage or another natural disaster, and insurance can help most when purchased as if a loss will definitely occur in time.
Questions To Consider
Learn how insurance known as business income protection can help your company in the event of lost income or extra expenses when your property is damaged by a covered peril.
How Is Business Income Defined?
Business earnings or income consists of the organization's net profit or loss. This is generally calculated by adding the regular proceeds from all sources and subtracting the costs of carrying out business. Both small businesses and multinational corporations face probable risks if physical damages occur to their business properties, causing lost net income or lost future profits.
What Does Business Income Coverage Include?
Loss of business income coverage, along with extra expense protection, insures the net lost income or profits that would have been earned if a material loss had not occurred from a covered event. This includes any additional expenses incurred from the loss, as well as any civil authority loss caused when a government entity denies access to a covered location.
These business interruption coverage plans are included under a property policy to provide coverage for normal operating expenses, such as payroll and basic utility services, and restoration costs. A business owner benefits from these plans in the event of lost profits or business interruption resulting from physical damages requiring restoration to covered property.
The calculator available here helps determine the business income and extra expense coverage limit to carry with the insurance company. It uses a bottom-up approach, starting with the net profit of your business and adding continuing expenses to come up with the appropriate amount of coverage for the property policy.
Given today's supply chain woes, contingent business interruption coverage is another valuable insurance product to consider. This policy covers business income losses that occur when a third-party distributor or supplier suffers a work stoppage that halts the production or services of the insured business.
Is Business Income Protection Required?
Yes, businesses are often required to carry this insurance. In fact, most business contracts have insurance provisions that include specific business earnings requirements. Even small businesses may find that the lender for a particular location, customer, or supplier has included a contract provision mandating business income coverage with an insurance company. Such requirements may also request coverage for civil authority-related claims.
What Doesn't It Cover?
A business income policy can help tremendously, but it doesn’t cover every need. Like all insurance policies, business income coverage has some exclusions. Here are a few examples:
- 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
- Losses that occur as a result of the economy
- Costs associated with a product recall, unless it is specifically covered
- Physical loss or damages 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 business interruption insurance policy form. They generally apply to business income coverage and not to extra expenses.
Any loss that occurs during the waiting periods, typically the first 24 to 72 hours, is not covered by the business income protection. Some policies can be endorsed to remove this waiting time entirely.
Does Business Interruption Insurance Cover the Same Perils as a Business Income Policy?
Currently, the terms are used interchangeably. In the middle of the nineteenth century, early versions of insurance coverage for financial losses due to damage to an insured company's property were called business interruption insurance. As the insurance changed with time, new names came into use. At present, many insurance companies use business income in their insurance title rather than business interruption.
Important Coverage Terms
Knowing a few terms related to business interruption insurance loss may help in purchasing appropriate coverage before a claim for damaged property occurs.
Actual Loss Sustained
When your business income policy includes actual loss sustained coverage, your net income losses are not capped at a specific limit, but the policy covers lost profits for your business during the restoration of your damaged property for a maximum of 12 months. Usually, no coinsurance applies. If the restoration period goes over 12 months, you may want to obtain alternate coverage with a longer restoration period.
A coinsurance clause is added to a business income policy to make sure a large enough insurance limit is purchased. The coinsurance requirement, usually between 50% and 125%, specifies the amount of insurance required to avoid a penalty.
If you estimate future profits for the next year at $500,000, and the coinsurance requirement is 90%, you must purchase a policy with at least a $450,000 limit to avoid a penalty of reduced compensation if a loss occurs. No penalty is applied until there actually are business losses.
Not all business interruption insurance policy forms are the same. Although some forms have a specified limit, others may be unlimited.
Some separate policy forms may impose coverage limits during the time benefits will be paid, such as 120 days or 12 months. Other insurance company policies impose limits up to a month, with a maximum payable for each consecutive 30-day span.
Since business interruption insurance typically may vary depending on the waiting periods, maximum amounts payable and the insurance company issuing the policy, it is advisable to consult with your insurance agent or another insurance professional before choosing your business interruption coverage.
When applying to the insurance company for business interruption coverage, include all operating expenses listed on the business income statement or federal tax return. It is difficult to determine which expenses for normal operations will continue until the time of a loss. Some costs may not continue at the full amount while other expenses, such as utility services, 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 kicks in while property repairs or replacements from damage by a covered loss are carried out and helps pay various expenses and additional costs above the cost of operations your company typically incurs. It may also include relocation expenses and loan payments or lease payments for temporary quarters. In most cases, coverage for added expenses is included with your company's business income policy purchased to cover lost income.
This refers to the maximum amount 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 guidance to determine how much coverage your company needs for adequate protection. Not all business income policies are subject to a limit. With most insurance companies, coverage applies to the loss incurred for no longer than 12 months.
Net Income or Loss
This refers to the profit or loss income of businesses before taxes are calculated. The figure representing the loss of profits can usually be found on the income statement. Lost income may also be found in the profit or loss statement or federal tax return. When calculating coverage for your company, always use the most recent 12-month figure from your financial records.
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Unless a business income policy excludes or limits ordinary payroll, it generally covers the payroll expenditures as a continuing expense. Executives, officers, managers and contract workers are not included in the ordinary payroll definition.
Since this payroll coverage grants pay for lost income to employees during the recovery period, it keeps them from leaving the company. Also, some labor agreements require the continuance of payroll and benefits.
Period of Indemnity
Period of indemnity refers to the maximum expected period of restoration or recovery that businesses would go through in the event of total loss. This restoration period starts after covered physical damage or loss brings business operations to a halt. Usually calculated in months, the length of time is considered when determining appropriate coverage limits for a business interruption insurance plan.
For most businesses, when operations resume after physical damage or loss from a major disaster or other covered peril, more time is required for business income to reach pre-loss levels. This may happen when significant property damage occurs, requiring considerable resources for repair or replacement, and an extended period of indemnity endorsement can be added to take the restoration period of the property into consideration.
In a sense, waiting periods perform the function of a deductible. Applied to business income coverage but not to extra expenses, waiting periods are built into the business income coverage form.
Any loss occurring in this duration, typically a 24- to 72-hour waiting period, is not covered by the business income policy. Some policy forms can be endorsed to remove waiting periods entirely.
How VANTREO can help with business income coverage
From our extended history in providing property insurance services, we have learned that apples for apples quoting simply does not work. At VANTREO, our insurance company understands that a business owner buys protection against loss, considering individual risk exposures.
We also know circumstances change. As a business owner, the property insurance services that manage risk and provide coverage now will be different next year. You need a property insurance policy strategy that provides coverage and protects your organization as things change.
At VANTREO, we take pride in services that enable businesses to take charge of their risk reduction and property insurance plan. We deploy a unique approach to business interruption coverage that combines cutting-edge technology and proven human expertise in helping you decide on the most appropriate business interruption insurance. Consequently, our insurance services office gives organizations the advantage of better protection and a better business interruption coverage plan that will actually increase the value of the enterprise.
Find out more about how our insurance services approach can help protect your business operations and property, and provide important advocacy in the event of a loss. Let us know how to initiate a conversation with you!