Business Interruption Insurance
Coverage Every Business Should Have
A sudden fire rips through downtown. The winter storms north east winds fuel the raging fire quickly tearing a devastating path through many downtown businesses. Your phone rings, it's 2:38 and your security company is telling you the bad news. A few hours later you arrive at what was once your office. The damage is extensive and what isn't coated in a frozen layer of water smokes in silent ruin. Key components and machinery are barely recognizable. The list of casualty unfortunately includes a $250,000 piece of machinery that took 3 months to order from Germany.
By afternoon you're several cups of coffee deep at your make shift coffee shop office. After several calls you estimate at least 2 months before you are back up and running. Before you can exhale your phone vibrates the table. Janet, the office manager is asking what to say to the employees. How would you continue to keep those employees and help them financially through this as well?
Almost always the key ingredients in my kettle of article ideas come from events experienced by new clients that walk through my door. A sudden fire, loss of electricity, or other devastating event can cause a business to lose thousands of dollars, or possibly force it to close permanently. Without the right coverage, or enough coverage, as a business owner you're risking everything. The damage to inventory and equipment is one thing, but what about the thousands of dollars your business is losing each day it's unable to conduct business. And how about your customers? Would you be able to keep customers if you are out of commission for a week, month, months? Don't forget the employees! You spent a great deal of time and energy getting the skilled people you currently have. You also have an obligation to them as they look to you for their livelihood. All this is the very reason Business Interruption coverage (sometimes called Business Income Insurance) is one of the most important insurance coverage's a business can buy.
Business Interruption Insurance - How It Works
Simply put Business Interruption Insurance provides loss of income a business suffers after a disaster and while it rebuilds. If you have a package or general liability policy you can add business interruption as additional coverage. Sometimes a package policy will include some level of business interruption coverage. Where a commercial property insurance policy covers the physical damage to a business building, or facility, business interruption coverage provides coverage for the profits that would have been earned and expenses to run your business elsewhere while rebuilding. One thing to point out, if business interruption is added to an existing business' primary policy, it will only pay out if the cause of the loss is covered by the general business primary policy. In other words, if the incident is not covered by the general policy business interruption won't cover its part either.
BASF/Wyandotte conducted a study and discovered 43% of businesses that closed because of a catastrophe never reopen. 28% of those that did reopen, ended up failing within three to five years.
The following are typically covered under a business interruption insurance policy:
- Profits- Profits that would have been earned (based on prior months' financial statements)
- Fixed Costs- Operating expenses and other costs still being incurred by the property (based on previous figures)
- Other Location- Some policies cover cost to move to another facility or office, including the extra cost that might incur in doing so (i.e. trucking costs because facility is further from routes)
- Extra Expenses- Unforeseen expenses that occur due to running business in current situation. For example, you may have to hire another manufacturer to make some of your products and this costs more than making them yourself.
This coverage extends until the end of the business interruption period, which is determined by the insurance company. Most insurance policies define this period as starting on the date of the covered peril and the damaged property is physically repaired and returned to operations under the same condition that existed prior to the disaster.
You Say Business Interruption Insurance I Say Business Income Insurance
Some are prepared, some are not prepared enough, but many are not covering themselves at all. BASF/Wyandotte conducted a study and discovered 43% of businesses that closed because of a catastrophe never reopen. 28% of those that did reopen, ended up failing within three to five years. Business Interruption insurance keeps your business going when a devastating event halts your business. It provides coverage for loss of income, day-to-day operating expenses, payroll, cost to rent out another facility and any other expense to keep your business up and running while you replace and repair the damage. It is simply one of the most important coverage's you could buy as a business owner. However, there's still several things you need to do to make sure you have the proper level of business interruption insurance. The following are some things to keep in mind:
- How much income is needed to continue operating in the event of a shutdown? Some plan out 6 months, but everyone varies.
- How quickly will the policy become active after you report an incident? Some policies carry a 72 hour time delay before coverage is active.
- Will you need additional coverage for extra expenses such as leasing temporary office space, computer equipment or office machines? It's important not to overlook the cost of unforeseen expenses. For example, you may lose some clients and that may mean a reduction in income. Calculate additional cost for time to bring in new business to offset this potential loss.
Extra expense insurance is an optional coverage you can add to business interruption insurance. It reimburses your company for a reasonable sum of money that it spends, over and above normal operating expenses, to avoid having to shut down during the restoration period. Usually, extra expenses will be paid if they help to decrease business interruption costs. In some instances, extra expense insurance alone may provide sufficient coverage, without the purchase of business interruption insurance.
Final Word on Business Interruption
So there you have it. Business Interruption Insurance- a vital part of any business insurance plan. If you do currently carry this coverage or are looking to get it it's important to make sure that you buy the right amount of coverage. The biggest issue companies come across when a disaster hits and they need this coverage is unforeseen expenses that eat away at the coverage causing coverage you previously thought was enough to sometimes fall short. For example, let's say you estimate for a 12 month period you'll need about $1,000,000 to pay your bills, employees and rent for a temporary facility until your building is rebuilt. A disaster strikes and you luckily have business interruption coverage. However, 3 months into the recovery period you realize that you're burning through fuel expenses at almost 30% above normal levels. The cost is associated to the temporary facility being 10 miles further from your customers. Extra Expense may help out a bit here, but this may create a serious issue if the financial dent is large enough. So, when estimating costs to run your business some will estimate an additional percentage for unexpected costs. 10, 20% might be a good safety net to add onto your estimates for this unknown expense.