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
HOW MUCH LOSS OF BUSINESS INSURANCE IS ENOUGH?
One of the most important things that we have learned from our extended history in providing business income insurance is that “apples for apples” quoting simply does not work. Every business is unique as are their risk exposures. Too often, business owners purchase business insurance as if a claim is highly unlikely. The reality is that losses happen all of the time.
Insurance can help if it’s purchased as if a loss with absolutely happen in time.
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 when it often takes 18 or 24 months or more to recover from a catastrophic property loss in today’s environment.
Purchasing adequate business income insurance starts with an initial assessment of the financial risk involved. Here are two free tools to help…