Out of Commission: What You Should Know about Business Income Insurance Coverage
by Drew Gunn, from Thompson Insurance
Here’s a startling statistic: 25% of businesses never recover from a catastrophic property loss. That’s a sobering thought. That said, most of these businesses fail to recover NOT because of a lack of property insurance, but because they underestimated how much revenue could actually be lost during the time it takes them to get back up and running. Because Business Income Coverage (also called, Business Interruption Coverage) is so important and often misunderstood, we wanted to answer the following questions, like:
“What actually causes a Business Income Claim?”
“What does Business Income Coverage Pay for?”
“What is my “Period of Restoration” and why is it so Important?”
And, “Does my Business Need some Form of Business Income Coverage?”
“What Causes A Business Income Claim?”
In order to trigger coverage all of the following conditions must first be present, in order to have a Business Income Claim:
1. “You” (the insured) must experience a…”
2. “Direct physical loss to your premises, as a result of…”
3. “A ‘covered cause of loss’, which causes a…
4. “Slowdown or suspension of your normal business operations and… “
5. “results in loss of income”
So a lot of things have to happen for the coverage to be triggered. But Basically, If your building or premises experiences a covered loss, that causes your business to slowdown or or temporarily shutdown normal operations, long enough for you to lose income…you probably have a Business Income claim situation on your hands.
“What Does Business Income Coverage Pay For?”
Let’s say you own a business which is dependent upon the use of your buildings. This could be a retail store, a manufacturing operation or another form of premises at which you conduct your business. Then, let’s say you experience a bad fire or a storm rolls through and demolishes your place of business. Not only is your building damaged but also your stock, merchandise or crucial business equipment is lost as well. How will you pay your staff, keep money coming in the door and avoid being among the 25% mentioned above?
Business Income coverage helps you prepare for that situation by providing coverage to help you:
1. Keep bringing in the revenue you ‘would have made’
2. Make payroll
3. Pay for Extra Expenses like a temporary location
4. And, possibly even pay for the increased cost of construction to rebuild, if building codes have changed.
“What is my “Period of Restoration” and Why Is It So Important?”
That biggest point I can make here is: Don’t be overly optimistic about your Period of Restoration!! Remember again the statistic about: 25% of businesses never recover from a catastrophic property loss. Most of the time this is a result of underestimated how much revenue could actually be lost during their Period of Restoration, or the time it takes you to get back up an running.
I can tell you that an OVERLY optimistic estimation of the Period of Restoration is a very common mistake. Therefore, it’s really important that you think of the Period of Restoration in “worst case scenario” terms.
Start this process by thinking about all the things that need to happen before you’re up and running again, like:
|Getting the Claim Adjusted by an Insurance Adjuster||60-90 days
Because that’s typically how long the carrier has to adjust your claim.
|Re-Draw Building Plans||75-90 daysMaybe less for less complex buildings, but think, “Worst Case Scenario”|
|Find and Hire a Contractor||30-45 Days, maybe moreRight now the building market is booming, so finding a contractor may prove more difficult than you think|
|Site Clearing and Prep||Up to 30 days or even moreYou’ve got to wait until the adjuster is finished adjusting the claim until you can begin clearing and preparing your site and removing debris.|
|Time to Rebuild||4-8 months or possibly even longerThis also depends on the complexity of your building. Weather conditions contractor availability and complexity of the building certainly are factors that could make this process take longer than expected.|
|Restocking Time||Varies by Industry|
|Hire/ Re-Hire Employees||30-90 DaysAssuming that you didn’t include employee payroll as part of your coverage, think about how much time it would take to rehire your staff or replace them. With the current labor shortage in this country right now it could take longer than you would think.|
|Replace Machinery or Equipment||30-90 DaysTake into account the time to find, purchase and install your crucial business equipment. Are special installers or parts required for your equipment and machinery?|
|Changes in Federal, State and Local Building Codes||Undetermined, Depends on Location
When you rebuild you may have to comply with newer local, state or federal building codes. This can not only cause construction delays but the increased cost of construction to repair or replace your building. NOTE: most Business Income Coverages do NOT provide lost income if you have delays as a result of compliance issues with local building codes unless otherwise stated in your policy.
Does MY Business need Business Income Coverage?
It’s very seldom that a business would not need SOME form of Business Income Coverage. Though traditional Business Income Coverage responds as a result of loss to physical property, there are some special types of Business Income Coverage which business owners, who do not operate a brick and mortar location, could use.
1. Extra Expense Only, Coverage – You would still need to meet the same requirements above, but it would simply pay for necessary expenses you incur during your Period of Restoration, like: Rent on a temporary location, rushed repairs replacements and other costs to help limit your period of restoration.
So, how do I figure all of this out?
Understanding the Business Income Coverage form is less about exclusions and more about understanding how long it would take you to get back up and running, the insurance definitions of specific words and how coverage is limited. It can all be very confusing so I would recommend talking to your agent or talking to one of ours.
Our agents have years of experience with businesses that have suffered catastrophic losses like these and helped them recover. We know the right questions to ask you to assist you in coming up with some realistic safeguards with regard to keeping your operation alive in the event of a long-term rebuilding process. So – your best bet would be to schedule an appointment with one of our agents, who will talk you through the process, help you do the important calculations, and really minimize the risk to your business that you’ve worked so hard to create and maintain.
For more, visit thomins.com.